Setting Standard Costs for Pharma Products

The Problem

Establishing standard costs for products in a Process Manufacturing setup like Pharmaceuticals can become a critical, strategic exercise if initial pricing decisions are to be based on the estimated standard costs. SPharma Std Costs Image 1 Case 6imultaneously – variance of actuals over the computed standards needs to be monitored so that the gaps are not significant – as frequent revisions of standard costs would be a costly and time consuming affair, while not updating standards in light of significant variances can lead to over / under costing – impacting organizational profitability performance adversely.

Key Challenges

  • Preparation of Bill-of-Quantities and determining the cost of such materials at each stage of the manufacturing process.
  • Estimation of consumables and manufacturing overheads such as direct wages, power, fuel, depreciation of equipment etc.
  • Estimation of administrative overheads like rent, salaries of indirect manpower, security, house keeping, canteen, transportation etc.
  • Estimation of sales & distribution expenses like carriage outward, Business promotion, advertisements & commissions etc

Determining the Standard Cost

The technical transfer of a particular molecule with Bill of Materials of that particular product – is made from R&D center to Production Center.  The Production, Planning and Control function studies the flow of materials and designs a suitable manufacturing process.

Based on the process, the production department plans the activities to optimize the available resources like materials, manpower & machines.  The cost of each process / activity is to be determined with 95% accuracy at the overall level.  This output is a standard cost which serves as the basis for indicative price. Other factors like market conditions etc are also considered prior to a final pricing decision.

Raw material costs were valued by the weighted average method, including freight & Insurance, demurrage charges, anti dumping duties and non-cenvatable duties / input VAT credits – if any.

Accurate estimation and valuation of consumables like chemicals, solvents, columns cost etc.

The Administrative, sales and distribution expenditure were captured for entire company and apportioned scientifically to all the products that are being manufactured and sold by the organization.

The entire process is designated as a separate cost center at which level the entire expense is captured

Monitoring overheads

The overheads captured in particular cost center should be related to such cost center only. For ensuring this,  strict instructions were given to all departments such as warehousing, engineering, HR etc  to capture all their expenses cost center wise.  To prevent errors at data entry or other levels,  sufficient training was given to the data entry operators. Errors at data entry level had to be rectified by costing department.  The costing department continuously monitored the costs for all the cost centers.  Costing department apportioned common overheads which are common for all cost centers scientifically to all cost centers.  The common overheads needs to be monitored quarterly and wherever the abnormal expenditure incurred the same needs to be examined.  The costing department either quarterly or half yearly adjusted the  over / under absorbed overheads to prepare accurate product costs.

Key Benefits

The accurate cost of sales is determined  based on which the management can estimate the margins to quote the price in the competitive market.

In case of cost over run, management will be in a position to take corrective action either by reducing the costs or optimizing the process.

Trustworthy product costing and visibility of product-wise margins enables the organization capture market share in competitive and highly price-sensitive markets – triggering a “virtuous cycle” of further expansion of production capacity and entering new markets confidently

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