Activity based costing analysis in ACME laboratories

Abstract

In last few decades the pharmaceuticals industry in Bangladesh expand at a very quick rate. According the Dhaka stock exchange report of year 2002 there was 16 Pharmaceuticals Company and majority of them were the foreign investment. However, in 2016 there are 73 companies operating and 23 companies are listed in the share market. The ACME Laboratories is one of the oldest pharmaceutical companies in Bangladesh, who started their operation in the year 1954. Currently ACME started to export medicine to Fiji, Nigeria Though it is one of the oldest company, in recent past years ACME face some serious challenges. As many new companies enter into the market and shifting of the customers demand large companies has reduce the price of the medicine significantly. As a result, ACME faced difficulties to maintain its profitability. They reduce the production of many highly demanded medicines just because they find those less profitable after readjusting the price with the market. Which affect the market share of the company and they moved to the 16th position from the fourth position. However, things are started changing after 2009. In 2009, the management switch to activity based costing method from the traditional costing method and re-calculated the entire product costing. ABC helps the company to sustain in the market because by the assist of ABC management can take the right decision for production. When they re-calculated the product costing they found that, not all high priced products are generating enough profit and some very low priced products are generating very high profit. ABC a more accurate cost management methodology. After applying ABC, they get the actual product cost because it makes the indirect expenses direct. Another important thing they found that, they could reduce market price of the product to match its competitors’ price, because after ABC they got many products, where they are overcharging the factory overhead. As a result, the cost of production was very high. When they adjust the factory overhead, the cost of production falls significantly falls, which gives the company to reduce the market price to match its competitors’ price for sustain in the market. Even in activity-based costing, some flaws need to be addressed. Some overhead costs are difficult to assign to products, such as the chief executive's salary. These costs are termed 'business sustaining' and are not allocated to products because there is no meaningful method. This lump of unallocated overhead costs must be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed. There are some other issues faced by ACME Laboratory Ltd, the issues like accurate information of activities, machine hour required, labor hour required, and selection of relevant cost driver to the cost centers. These Page 2 of 28 issues are very important to implementing the ABC, because the credibility of ABC totally depends on the selection of the correct basis of the allocation of overhead. ACME is still working on it, to ensure the basis are select on the relevant cost driver, and they are designing a system where they can easily profiling each of the activities that are needed to perform to produce a particular drug.