COSTING IN PHARMA INDUSTRY (API / BULK DRUG MANUFACTURING): CHALLENGES AND COSTING METHODS AND TECHNIQUES

In pharma industry, batch manufacturing process is followed which involves multitude of activities, manufacturing in batches and multiple stages. The production process produces intermediate stages which are used in the next stage. In some cases, some quantity of a stage may even be sold.

Costing is done at various levels and finally the product cost is arrived.

• Activity/ cost center wise booking of expenses and costing for each activity. Each manufacturing process is considered as a separate activity or production cost center. Other cost centers are utility cost centers, service cost centers, etc.

• Batch costing includes cost of any direct materials, direct labour and direct expenses that can be directly identified to a particular batch and share of utilities and overheads chargeable to the batch (calculated on some equitable basis) is also included in the batch cost. For example, power and other utilities cost, quality control cost, factory overheads, etc.

• Stage wise / Intermediate product costing

• Final Product costing

High Level Production Process Chart in API industry and Booking of Costs and recording of statistics

H

 Problems in implementing costing system

•  Complexities in collecting of the raw data

• Delays in getting the accurate costing statistics from various departments

• Incorrect allocation of indirect costs due to wrong selection of basis or incorrect data

•  Hourly and daily statistics not recorded properly or though recorded, the data is not     consolidated   properly for further use in costing.

•  Booking of cost center wise expenditure    

       With proper recording of hourly/daily production statistics and with the help of appropriate cost  accounting methods, it is possible to streamline operations and reduce or eliminate unpredictable adverse variances. Despite the difficulties, companies must measure true costs for accurate reporting.

A system is needed for keeping track of perpetual costs until the completion of a production job. Normally, costs are recorded only after the completion of the batch. Data relating to reworked batches is also to be captured.

Proper basis for allocation of indirect overheads to various cost centers is to be determined and statistical data is to be maintained accordingly. Machine hours for each process and for each stage/Product is to be captured.

Other factors which impact the costing and analysis

Inefficiencies may occur even due to lack of any properly identified Key Performance Indicators (KPI) and lack of proper methods to track inefficiencies.

Proper Internal control systems in place is also key to reduce or remove the inefficiencies at various points in the flow of receiving the material till the dispatch of the products.

Reconciliation of quantitative data and stock movement statements play a key role in costing. Daily/Monthly/Quarterly/Annual Reconciliation statements of input materials, stores and spares, finished goods are to be maintained.

Sometimes during the production process, it becomes necessary to replace a material with its substitute or change in the quantity of the material. This does not reflect in BOM and hence considered as overhead costs. Proper system is required to book the changes in material/ solvent consumption to the particular batch and thus arrive at the actual consumption cost.

COSTING METHODS

There are three major costing methods used in API manufacturing industry:

1.  Absorption costing
2.  Marginal costing
3.  ABC costing
4. Standard costing

 

1. Absorption costing includes all the variable and fixed manufacturing costs and the post             manufacturing costs to arrive at the total cost of the product. It absorbs all the costs.
2.  Marginal costing is easier to implement. It includes only the variable costs and the           contribution is arrived at. The marginal costing reports help the management in quick decision      making.
3.  ABC costing though difficult to implement, it helps to remove the inefficiencies.
4.  Standard cost method can significantly help reduce hidden costs. The companies are having   standards for outputs and the standards for major cost components especially material, labour. It   offers insights into daily cost, cost variances.

Absorption costing -Sample Cost Sheet is given below

Quantitative Information

Particulars	UOM	Quantity
Installed Capacity
No of Batches
Production Qty.
Purchase Qty.
Increase/Decrease in Finished goods Stock
Adjustment /Waste Qty.
Captive Consumption
Sales Qty.
Standard Input
Standard Output

Cost Information :

Particulars	Amount	Rate per Unit
	(INR/Lakhs)	(INR)
Materials Consumed
Process Materials/Chemicals
Utilities Cost
Direct Employees Cost
Direct Expenses
Consumable Stores & Spares
Repairs & Maintenance
Quality Control Expenses
Research & Development Expenses
Technical know-how Fee / Royalty
Depreciation/Amortization
Other Production Overheads
Total
Increase/Decrease in Work-in-Progress
Less: Credits for Recoveries
Primary Packing Cost
Cost of Production/Operations
Cost of Finished Goods Purchased
Increase/Decrease in Stock of Finished Goods
Total Cost of Production and Purchases
Less: Self/Captive Consumption (Incl.samples,etc.)
Other Adjustments( if any)
Cost of Production of product  Sold
Administrative Overheads
Secondary Packing Cost
Selling & Distribution Overheads
Cost of sales before Interest
Interest & Financing Charges
Cost of Sales
Net Sales Realization (Net of taxes &Duties)
Margin [Profit/(Loss)] as per cost Accounts

 

Customized Cost sheets and Cost MIS reports/ Dashboard provided during the implementation of the cost management system.

 Cost sheets designed based on the industry, company and its operations and method of costing adopted.

 

CMA Manjula Gutti

Cost and Management Accountant

Email id: manjula_asso.cma@rediffmail.com

Mobile No: +91 9989065215