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GlaxoSmithKline is one of the most well-known multinational pharmaceutical companies. It is thefourth largest pharmaceutical company, which was measured by 2009 prescription drug salesafter Sanofi,Pfizer,and Novartis. It works for healthcare of people and provide them safest medicine with low side effects to keep the user healthier and to control the diseases they are suffering from. For this purpose, GSK works with a typical professional staff in production side. They must carefully monitor and take care of hygiene during production. The purpose of this report is to explain that which raw materials are used, how many hours labor work, overhead cost and other operating costs incurred, and types and elements of production cost involved in the production. It also explains which cost system is used in GSK, and how the product department works.
Chapter 01: Introduction
- Introduction to report :
We, group members have chosen the production department of Glaxo Smith Klien for our report. We have selected this organization because it is a well-known pharmaceutical Multinational organization and having an eminent name around the world. For gathering information we will visit and conduct a survey at the production department through the reference Mr. Syed Ali Rahber who will arrange a meeting with Mr. Muneer Ahmad, cost accounting manager, and help us in collecting necessary information required about the production department of GSK, and then we will able to make our report.
- Purpose of report:
Some of the purposes of this report is that;
- To help us in understanding and get familiar with the implementations of cost accounting in organizations with an organized report.
- It provides a platform to share the real experience for production department of the organization in a heading vise, proper writing.
- to help us gather information in a proper written form and help reader to easily go through the overall activities and purpose of activities in cost department of the firm.
- It provides a summary about the facts and information gathered from the survey in the Cost department of the firm.
- To help us to show the activities attached with cost management and how the company’s head and its top level managers assign material, labor and factory overhead to each job or department.
To shows cost’s activities i.e. manufacturing cost (material, labor and factory overhead) and operating cost (selling and administration) and the cost system used in organization.
- Methodology of study:
The methodology we have selected is to conduct an interview with Mr. Muneer Ahmad, cost accounting manager. We preferred this method to get a clear picture of the process of costing and production from start to end and to find out the flow of activities involved in during production. It is the best way to investigate and discover from a professional about the information we needed and to be guided in a proper way. It is an easy way to get the information from an accounts manager who understood our questions and replied us related to what we asked.
Chapter 2: Cost Accounting
- Definition of cost
Cost Accounting is a kind of accounting process that, through evaluating all input costs of production incurred in a making product or products and it also includes fixed costs for instance depreciation cost of capital equipment, intend to detain a company's production costs. Cost accountinghelps management to find out costs for products, operations, functions, or inventories and to control cost, cost accounting compares actual cost to predetermined cost. It also provides a variety of data for a daily basis decisions and provide important information for long range decisions. In fact, cost accounting is an accounting for a production unit and it controls final cost of manufactured items which facilitate sales department.
- The role of cost accounting (how it helps the management)
The Need for Cost Accounting
Cost accounting can be a useful tool for managers as they deal with the challenges of reduced donor funding, competition from other health service providers, increasing costs of service delivery, and, often, increased poverty within the communities they serve.
One of the several benefits of cost accounting is that it turns data into information, wisdom and knowledge about a business entity's operations that is useful for the following activities:
- Measurement of performance
- Managing or Reducing costs
- Finding out the prices for goods and services
Cost accounting facilitates the needs of decision making to managers and provides ease to the management within an organization. Management processes includes:
- Planning: A business plan revolve around the strategic aspects of a project and is projected to permit the manager and core team make intelligent decisions by serving organize and establish a series of resources which in future help the objective to be achieved. Cost accounting provides short term and long term tools of planning for financial pricing decisions, budgeting, forecasting, break-even analysis, cost-volume-profit analysis and others.
- Implementation:Managers and supervisors involve in solving problems and making decisions for the organization. New managers and supervisors, in particular, often make solve problems and decisions by reacting to them. They are, sometimes, under the stress and have a very short time period. Therefore, when they find a problem or have to make decisions, they react with a decision that seemed to work before. It is simple with this approach to get stuck to solve the similar problem again and again. Consequently, as a new manager or supervisor, Cost accounting facilitates managers or supervisor to compute their resources in order to implement their plans.
- Control:Decision making process is not a separate function of management. In fact, decision making process is intertwined with the other functions, such as, Coordinating, Planning, and Controlling. For making decisions these functions are required. For instance, at the beginning, management has to make a critical decision as to which of several strategies would be followed. Such decisions are often called a strategic decision because of its long term impact on the organization. Managers must also score a lesser decisions, tactical and operational, all of which are significant to the organization's health. Cost accounting provides data for comparing performance against set targets. This response information is used to assess, correct, and therefore, control operations.
Leadership and Communication:A leader gets success as against how efficient he makes decisions, and sometimes these decisions are critical and that’s why difficult to make. Though, the bold and daring decisions are the safest. Cost accounting provides a valuable and practical direction for making effective and efficient decisions. Cost accounting has a key role in supporting communication and leadership. Cost control techniques provide information that can be shared within an organization to provide direction to all.
- Contribution of cost accounting
The contribution of Cost Accounting in the Organization is discussed below;
Purposes of Accounting Systems:
Accounting is a major means of helping managers of an organization, equity investors of an organization, potential equity investors, creditors and bond holders of an organization, potential creditors and bond holders of an organization, suppliers and customers of an organization and other stake holders to take decisions.
Accounting covers and provides information for three key purposes:
- External reporting: These reports are used by government authorities, creditors, investors, and some other outsider parties.
- Routine internal reporting: These reports are used by managers of the company for their internal decisions and are generated periodically.
- Non-routine internal reporting: To support projects and other decisions which arise as the need arises from them, for this purpose these reports are generated. While the reports are prepared, to facilitate decision making, in diverse formats and basic data is controlled or summed up in a variety of ways. by the accounting system there is only one data base maintained that it holds data in the form of debits and credits to different accounts that is maintained in the accounting system. To provide information to external and internal users, Accountants combine these data items in different ways.
Chapter 3: Glaxo Smith Kline plc (GSK)
- Overview of the company:
GlaxoSmithKline plc(GSK) is a well known Britishmultinationalpharmaceutical Company,vaccines, biologics,and a healthcare company. GSK’s headquarts is located in London, United Kingdom. In 2009, Gsk was measured the fourth largest pharmaceutical Company of sales ofdrug (followingSanofi, Novartis and Pfizer) in the world.GSK was established in 2000 by the merger ofSmithKline Beecham plc(formed from the merger ofSmithKline Beckman and Beecham plc Corporation, which was formed by combining the Smith Kline French and Beckman companies) and Glaxo Welcome plc(formed from the acquisition of Wellcome plc by Glaxo plc).
For major disease areas which include cancer, asthma, infections, digestive conditions virus control, diabetes and mental health, GSK has a range of drugs/medicines. It also engaged with consumer healthcare division that produces and markets oral healthcare and nutritional products, drinks and over-the-counter medicines, includingHorlicks, Boost,andSensodyne.
GSK has 97,000 employs working around the globe,of whom around 12,500 work inR&D (research and development) to create more enhancements in its medicines. Its global headquarters are GSK House inBrantford, United Kingdom, with its United States headquarters based inResearch Triangle ParkinNorth Carolinaand its consumer products division based in thePittsburghsuburb ofMoon Township,Pennsylvania. The research and development division has major facilities in South East England,Philadelphiaand Research Triangle Park in North Carolina. GSK exists in 99 cities across 39 countries.
- Organizational chart:
Following a list of Major Departments of GSK:
- Production Department: includes Packaging, Processing, Engineering and Quality Control.
- Administration Department.
- Human Resource Department.
- Finance Department: includes Treasury, Costing, budgeting and Payroll Salary department.
- Information Technology Department,
Chapter 4: Cost Elements
Elements of cost (explain each element with reference to the company e.g. what exactly raw material company is using and how procure it, get as much information as you can)
Manufacturing for production of Augmentin,
- Raw Material: Amoxycillin Trihydrate, Potassium clavulanate.
375 mg per tablet
625 mg per tablet
1 gram per tablet
156.25 mg (power) per 5 ml = 60 ml bottle
312.50 mg (power) per 5 ml = 60 ml bottle
And some other supporting materials.
Budgeting for materials:
Materials are planned according to the batches of tablet is required,
For budgeting of materials, they already have details about how many batches are required for a tablet with respect to budget. Then, according to the details, it is estimated and planed that how much raw material should be incurred. The total weight of one batch is 300 kg, after deduction of wastage, it turns into 298 kg.
Budgeting for labors
For budgeting of how many hours a labor would work, firstly they find out how many units have to produce according to requirement. The next step is taken to find out labor per hour in rupees is all labor costs are added to find out total budgeted labor cost (including allowances like bonuses, overtimes etc) then they are divided by total budgeted labor hour.
- Factory Overhead:
All indirect expenses such as maintenance, canteen, security, warehouse, laboratory, repair, depreciation, power, electricity, light and water.
Budgeting for overheads:
- Increase in sales related over last year
- Inflation related
- Staff related
Insurance on production facilities and equipment
Same as last year
Equipment setup costs
According to the budget
Property taxes on production facilities
Same as last year
Production supervisor salaries
Factory small tools charged to expense
Quality assurance salaries
Same as last year
Factory building insurance
Same as last year
Materials management salaries (Warehouse)
- Selling Expense
- Administrative Expense
- Human resource
- Information technology
Chapter 5: Classification of cost
5.1 Cost in relation to a product (Manufacturing and Other operating cost) - Only listing of types of costs and elements from the company, is required.
Costs, incurred in the production of Augmentin are;
- Elements of a product:
- Material: direct and indirect
- Labor: direct and indirect
- Factory Overhead
Elements of a product are discussed above.
- Relationship to production
Prime cost: Prime cost is the sum of direct material and direct labor. These cost incurred in the product i.e Augmentin is discussed above.
Conversion cost: It is the sum of direct labor and factory overheads.
- Relationship to volume:
Fixed cost: rent, Insurance of factory, water, canteen, maintenance, depreciation, building expense
Variable cost: for production; in case of low production, low machine cost, low material, low labor, low factory overhead.
- Department where incurred
Production departments: The costs which are incurred in the production department of an organization are direct material and direct labor.
Service departments: service department provides service to production overheads which includes maintenance, laboratory, testing laboratory, canteen, maintenance department, security, warehouse etc. Maintenance department monitor and take care of machines and air conditioning system etc
- Functional areas:
It covers the following areas,
- Manufacturing area
- Tableting area
- Concentration area
- Packaging areas
- Marketing costs selling cost
- Administrative and distribution cost
- Financing and computerizing cost
- Relationship to planning, controlling and decision making.
Budgeted costs: a budget is prepared 6 months before the production, then, after production, it compares with actual cost.
Controllable and non controllable costs: Budget is made to control cost. The actual cost may be greater or lower than the budgeted cost. The difference between actual and budgeted cost is called variance. At the end, variance reconciliation is done by the organizations.
Relevant and irrelevant costs
5.1 Cost in relation to volume of production:
Chapter 6: Cost System
Cost System of GSK
The cost system is being used by GSK is Standard Costing. Standard costs are usually relates with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.
Rather than assigning the actual costs of direct material, labor, and manufacturing overhead to a product, Standard Costing System of GSK assign the expected or standard cost. This means that cost of goods sold and a manufacturer's inventories would not begin with the actual costs amounts but the amounts reflecting the standard costs of a product.
The main reason for using standard costing systems by GSK is to control the costs incurred during production. We might think that standard costing procure less information than actual costing, because a standard costing system uses budgeted amounts to tracks inventory that were recognized before the period, and fails to integrate important information about how actual costs is different from budgeted cost throughout the period. Nevertheless, this interpretation is not correct, because actual costsaretracked by the accounting system in journal entries to accrue liabilities for the purchase of materials and the payment of labor, entries to record other costs related to production and entries to record accumulated depreciation. Consequently, a standard costing system records bothactual costs incurred andbudgeted amounts (via debits to work-in-process, finished goods, and cost-of-goods-sold). The difference between these actual amounts and budgeted amounts provide important information about the controlling of cost. This information could be available to a company that uses a normal costing system or an actual costing system, but the analysis would not be an essential part of the general ledger system. Rather, it might be done, for example, on a spreadsheet program on a personal computer. The advantage of a standard costing system is that the general ledger system itself tracks the information necessary to provide detailed performance reports showing cost variances.
Chapter 7: SWOT Analysis
1. GSK is one of the world’s top-5 largest pharmaceutical companies.
2. GSK is one of the largest investor in R&D around the globe and is UK's biggest private sector funder ofR&D.
3. GSK is awarded chemical industry manufacturing and resource efficiency.
4. GSK has a powerful R&D, which focus and discover new markets.
5. GSK has a worldwide existence in over 100 countries.
6. It has over 97000 employees all over.
1. Controversies concerning the issues of drugs safety influence company’s image.
2. Has expiry of Patent for a numberof bulk-buster products.
1. Strategic conformity with other pharmaceutical organizations and companiestoenhanceits research.
2. Increasing of awareness, among the people, regarding healthcare. 3. Has an opportunity of worldwide penetration through acquisitions and mergers .
4. Demand for quality healthcare solutions is increasing.
1. Risk of unsuccessfulness of new Products.
2. Regulatory environment is becoming more & more stringent.
3. Slowing down the economies in European markets.
Gsk is the world’s second largest pharmaceutical company
- There are more than 100,000 thousands employees worldwide
- Gsk use standard costing system to calculate its total cost.
- Gsk is committed to supply quality medicines to its consumers
- Gsk invest a large amount I it’s research and development activities
- Gsk is committed to provide innovative products in market
- Name: Syed Ali Rahber
- Company Name: Glaxo Smith Klien
- LENGTH OF Service: 33 years
- Nature of Job: X Cost and Management Accountant
- Launched best selling product (Augmentin) in 1985.
- Created various costing and budgeting system for the company.
- Preparing budgeting and long range planning.
- Won president role of honor award in 2003, it is 1st and last award in Pakistan.