(Pharmacare Laboratories (Pvt) Ltd.

Pharmacare Laboratories (Pvt) Ltd.(Pharfen)

Cost AccountingProject 2

Presented to:Ms. Maheen Khan

Presented by:Mahira IftikharM Tanzeel MohsinNida Zahid ButtTaimoor FakharUsman Omer

Table of ContentsAbstract1Introduction2Product Portfolio3Vision Statement3Mission Statement3Production Flow Chart3Job order Costing4Calculation4Analysis4Material cost flow chart Analysis4Comparison between MFCA and Pharmacare costing method6Tradition cost method (2014)7MFCA (2014)9Conclusion and Recommendations:10Appendix11

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AbstractThe report includes analysis of costing of Pharmacare Laboratories (Pvt) Ltd. Material flow cost accounting (MFCA) charts are created and analyzed in comparison with traditional costing method used by Pharmacare. It was concluded that MFCA approach identifies the waste as a negative output of Pharmacare which need to be reduced for better profitability and healthier environment. In the end recommendations are provided for company to improve on its waste management techniques.

IntroductionThe Pakistan Pharmaceutical Industry meets around 70% of the country's Demand. The Pharmaceutical Industry in Pakistan has grown during the last few decades. At the time of the independence in 1947, there were few production units in the country. Currently Pakistan has about 400 low technology, large volume, pharmaceutical formulation units mainly running on Chinese equipment, including those operated by 25 multinationals present in the country. Pharmaceutical industry is overlooked by Drug Regulatory Authority of Pakistan and it is considered as the most regulated industry in Pakistan.

Pharmacare Laboratories is one of the leading Pharmaceutical Companies of Pakistan, engaged in manufacturing pharmaceutical drugs since 1985. Mr. Babar Mehmood Chaudhry, CEO of Pharmacare worked for over a decade in pharmaceutical industry in Spain. He returned to Pakistan later to set up Pharmacare along with his 4 brothers who then by their professional approach and un-tired efforts built Pharmacare into a Pharmaceutical industry of tremendous potential.

The quality of all the drugs formulations manufactured complies with the international required standards like United States Pharmacopeia standard, and British Pharmacopoeia standard. The company follows Good Manufacturing Practices (GMP), and current good manufacturing practices (CGMP). The firm is ISO 9002 certified. The high end services of Pharmacare stretches from consistent high quality, constantly expanding portfolio to timely deliveries etc. conforming to the most stringent as well as demanding International Standards.

Pharmacare has always remained active to meet the health care need of patients with the help of their qualified and experienced workforce. Company is committed to make use of highest level of scientific knowledge, changing technology and continuous innovation to discover, develop and deliver innovative, cost effective quality medicines second to none to the consumers.

Pharmacare continues to serve their customers and contribute towards improving health care in Pakistan. Company sets the standards for quality, efficacy, and safety of medicines. The trust of consumers on companys quality medicines, treatment and cure of diseases in key therapeutic areas, allow Pharmacare Laboratories to become one of the leading Pharmaceutical manufacturing company in Pakistan. Company has a wide spread network of distribution which allows them to reach consumers in areas far from the production facility efficiently.

Product PortfolioPharmacare currently has a portfolio of over 100 products which has been growing over years. Company has characterized their products into 4 broad categories; Suspension; Capsule; Tablets; Injections. They currently deals in 7 Therapeutic classes; Antianxiety, Analgesic, Antiulcer, Hypolipidemic; Antiatheroma; Antiplatelet; Hematinic. The product under our study is Pharfen, and the most common name used in market is Brufen for this as the main salt is Ibuprofen.

Vision StatementWe aspire to be recognized globally as reliable, trusted and most valued healthcare company.

Mission StatementTo walk through the path of new technology, pursuing scientific Knowledge, continuous Research and Development, innovation and quality assurance discover, develop and deliver innovative, cost effective and quality medicines that help patients to prevail over serious diseases. Thus ensure benefit to the society at large.

Production Flow Chart

Production of any drug begins after the sales teams complete their survey and provide production manager with forecasted sales figure. Production managers after receiving forecasted figure, prepares a Raw material requisition sheet for batch production. Once its prepared, company releases stock for production, which by law has to pass through Quality Control (QC) department to ensure the optimum quality of salts used for manufacturing drugs. After a green signal from QC department, production begins where salts are mixed and put in shape with the help of mechanical equipment and requires less labor effort. In the subsequent stage, drugs are put into containers and labelled which is labor intensive process. Lastly finished drug is inventoried for sale over the next year.

Job order CostingPharmacare is currently using job order costing as they have a wide portfolio of above 100 products and to set a price for each product, they have to compute the cost associated with its manufacturing. For the calculation of total cost of Pharfen, Company applies 15% factory overhead rate to prime cost for calculation of factory overhead. 5% wastage of actual raw material of drug is taken in advance and added to total cost of raw material to account for wastage of raw material. 3% wastage of packaging material is also taken in advance and added to cost of packaging material to account for waste of packaging material.

CalculationSee Appendix I for CostsSee Appendix II for MFCA

AnalysisPharfen Material flow cost accounting (MFCA) chart was created for last three fiscal years and compared over time to understand the trends and MFCA was also compared with traditional costing method adopted by Pharmacare to understand the differences.

Material cost flow chart AnalysisPharmacare produced 125,000 packs of Pharfen in fiscal year 2012 and 120,000 packs during fiscal year 2013 and 2014 each. This can be attributed to the fact that the finished goods inventory of Pharfen was high in first 2 fiscal years. Since, Pharfen has an expiry of 3 years it is very important for Pharmacare to ensure that stocks clear up before they expire. To ensure this, Pharmacare has to keep low inventory of finish goods which they manage by varying the number of units produced. 201420132012

packs in Inventory28648783515

Over three years company has allotted 5% of total of raw material used in producing Pharfen as wastage cost and added it to total cost of Raw material and has also allotted 3% of total cost of packaging material as wastage cost and added it to total cost of packaging material. Company believes that labor tends to waste more time in production department as most of it is mechanized so they have assigned 5% weight to total labor cost as negative output whereas, packaging process is labor intensive so it keeps the labor busy so, 3% of the total labor cost in packaging process is considered as waste. Factory overheads are distributed over 2 processes; 70% for Production, and 30% for Packaging. Company believes that most of the energy and other indirect costs are associated with production facility of the drug so they have allocated a higher percentage to it whereas packaging is considered to consume less space and energy so it is allotted lower percentage. Company has been able to maintain net wastage of direct material at 4.7% over last three fiscal years which reflects consistency in the production process. This means that company is utilizing its raw material at full. The net wastage of direct labor is consistent at 5.06%. This means company policy of considering 3% wastage in labor for packaging process has to be revised and a better percentage of wastage should be allocated. In order to reduce the loss percentage of direct labor, company should implement strict policies and ensure effective management of labor skills. Factory overheads wastage has also been consistent at 6.4% which is highest of all wastage costs. This can be attributed to high wastage of energy because the production process is mechanized, machines may be wasting higher amount of energy.

Comparison between MFCA and Pharmacare costing methodMaterial costs often represent a large part of costs in industrial enterprises and, thus, for companies it is necessary to focus on material efficiency in order to save materials and material costs. The essential point of MFCA is to recognize waste as non-marketable (second) products in the sense that materials are consumed and manufacturing facilities are used. In MFCA, waste is considered as a negative product hence has cost allocated to it based on certain criteria, in our case it was percentage of input cost whereas in traditional costing method used by Pharmacare had only taken waste cost for direct material only. This is misleading as the labor and factory overheads are not utilized at full. Labor tends to waste time by chit chatting or taking breaks which are not incorporated in traditional costing but MFCA divides their output into negative and positive. Similarly, energy is never 100% converted and there are energy losses so assuming 100% output of factory overhead is also overstating our product costs. According to MFCA chart, positive product total cost of Pharfen for 2014 comes out to be PKR 25,035,352 and a negative total cost comes out to be PKR 1,288,838 which is about 4.90% of total cost. This percentage has remained consistent for 3 years which tells that company is wasting its resources and can work to increase its production efficiency through capital investment, based on appropriate and accurate evaluation of investment projects. On the other hand with traditional costing approach used by company the total waste comes out to be 2.99% and that too is added into total cost of a product. In the costing approach used by company, total cost of a product comes out to be PKR 34,335,900.00 whereas according to MFCA it is PKR 26,324,190. The company has incorporated the cost of administrative, miscellaneous, sales promotion, distribution costs and cost of sales in the calculating the total cost of a product. On the other hand MFCA costing technique incorporates direct material costs, direct labor cost and factory overheads only.

Tradition cost method (2014)NAME OF MATERIAL 120,000 Packs Cost

Ibuprofen PKR 18,000,000

Starch PKR 435,600

Sodium L.Sulphate PKR 38,400

Mag. Stearate PKR 32,400

Methyl Paraben PKR 24,000

Propyl Paraben PKR 3,600

Sugar coating Material cost PKR 780,000

Sugar coated Tablets Labour& printing cost PKR 480,000

Total PKR 19,794,000

Waste5% PKR 989,700

PKR 20,783,700

Packaging Material

Plastic Jar PKR 1,080,000

Polythene bag PKR 30,000

Label, Glue, Etc. PKR 36,000

Corrugated Box PKR 84,000

Sub - Total PKR 1,230,000

Waste3% PKR 36,900

Total PKR 1,266,900

Direct Labor (Packaging) PKR 480,000

Direct Labor (Production) PKR 360,000

Prime Cost PKR 22,890,600

Indirect Cost

FOH15% PKR 3,433,590

Administration5% PKR 1,144,530

Miscellaneous10% PKR 2,289,060

Sales Promotion Cost5% PKR 1,144,530

Cost of Sales5% PKR 1,144,530

Distribution Cost10% PKR 2,289,060

Total Cost PKR 34,335,900.00

MFCA (2014)

Conclusion and Recommendations:It can be concluded from the above analysis that company needs to incorporate the wastage of labor and factory overhead as well to better state the costs. Secondly the company needs to exclude the costs of administrative, miscellaneous, sales promotion, distribution costs and cost of sales while calculating the total cost. Thirdly, company has no waste management department that manages waster and no information was provided to where do the waste of raw material and packaging material goes. Lastly company has allocated random percentages of factory overheads to both processing stages whereas they need to calculate the actual amount of factory head and according to it, apply rates for future. MFCA offers insights to company material flows and provides guidelines for improvements. Pharmacare needs to increased production efficiency through capital investment, based on appropriate and accurate evaluation of investment projects (Latest technological equipment). Company can reduce their costs through changes in product design and raw materials based on precise evaluation of manufacturing cost. Employees can be reinforced for lower labor wastage by revitalizing on-site improvement activities (e.g. environmental and quality management systems) by providing specific targets to them.

Appendix

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