Manufacturing cost controlling at united international pharma for a period of 2008 to 2010

LIST OF ABBREVIATIONS UIP: United International Pharma SWOT: Strength, Weakness, Opportunity and Threat PV: Spending variance AQ: Actual quantity AP: Actual overhead rate SP: Budgeted ov

MBAVB2

VUONG THI THUY TRANG

MANUFACTURING COST CONTROLLING AT UNITED INTERNATIONAL PHARMA FOR A

PERIOD OF 2008 – 2010

MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION

(PART-TIME)

Ho Chi Minh City (2011)

SUPERVISOR’S COMMENTS

Ms Trang has been working hard for this thesis She applied her knowledge of manufacturing cost technique and working experience to present a detailed analysis activity of manufacturing cost performance in order to figure out manufacturing cost controlling experience of United International Pharma She has made much effort in collecting data and analysis to find out manufacturing cost controlling of the Company I approve this thesis for final presentation in front of the Examination Board

Dr VÕ TH QUÝ

ACKNOWLEDGEMENTS

Firstly, I would like to express my deep gratitude and sincere thanks to my supervisor Dr Vo Thi Quy for her valuable advises, attentions, guidance and fast feedback which brought me to the right direction of the research

In addition, I would like to send my big gratitude to Ms Le Thi Thanh Lan and all

my colleagues in United International Pharma who assist me to complete this final project

Finally, I wish to acknowledge and thank to all professors, co-ordinators Mr Serge Bywalski, Ms Tran, Ms Hien, Ms Ha and my classmates of MBAVB2 program who have delivered valuable experience, knowledge and assistance to me during the course

TABLE OF CONTENTS

EXECUTIVE SUMMARY 1

CHAPTER 1: INTRODUCTION 3

I Problem context 3

II Statement of the problem 4

III Objective of the research Study 4

IV Scope and limitation of research study 5

V Study methods 5

VI Organization 6

CHAPTER 2: REVIEW OF RELATED THEORY & LITERATURE 7

I Cost Definition and Classification 7

1 Definition 7

2 Classification of the cost 7

II Cost Control 8

1 Definition of cost control 8

2 The role of cost control 8

3 Factors affecting the cost control 9

4 Cost management 9

4.1 Standard costing method 10

4.2 Variance analysis 12

4.2.1 Direct material cost variances 13

4.2.2 Direct labor cost variances 14

4.2.3 Variable and fixed production overhead variances 14

4.3 Controlling cost 17

4.3.1 Controlling material cost 17

4.3.2 Controlling labor cost 19

4.3.3 Controlling production overhead 20

CHAPTER 3: UIP AND ITS MANUFACTURING ACTIVITIES 23

I United International Pharma Inc (UIP) 23

1 Mother company – United Laboratories, Inc (Unilab) 23

2 UIP organization 24

3 UIP products 25

4 Channel 25

4.1 Wellness Channel 25

4.2 Illness Channel 25

4.3 Ethical channel 26

5 UIP position on Vietnam pharmaceutical market 26

6 UIP’s financial status 28

II The UIP’s manufacturing cost 29

1 The direct material 29

1.1 Price 30

1.2 Quantity 30

2 Labor cost 33

2.1 Labor cost items 33

2.2 Allocation labor cost 34

3 Factory overhead 41

3.1 Factory overhead items cost 41

3.2 Allocation of factory overhead 43

CHAPTER 4: FINDINGS DISCUSSION 49

I Materials 49

1 Price 49

1.1 Variances analysis 49

1.2 Findings 49

1.2.1 Exchange rate 49

1.2.2 Consumer Price Index 50

2 Quantity 52

2.1 Variances analysis 52

2.2 Findings 54

II Labor cost 55

1 Variances analysis 55

2 Findings 56

III Overhead 57

1 Variances analysis 57

2 Findings 59

IV Manufacturing cost controlling performance 59

V Summary of factors negatively affecting to the manufacturing cost 60

CHAPTER 5: CONCLUSION AND SUGGESTION 63

I Conclusion 63

II Valuable lessons, further suggestions and further research 64

REFERENCES 69

APENDIX A 71

APPENDIX B 72

LIST OF TABLES

Table 1: Profit & Loss of UIP from 2008-2010 .28

Table 2: Details of COGS versus net sales from 2008-2010 29

Table 3: Raw material formulation of Ceelin Syrup 31

Table 4: Packaging material formulation of Ceelin Syrup 31

Table 5: Material cost of Ceelin Syrup 32

Table 6: Main items of direct labor cost 2009 33

Table 7: Direct labor cost driver in workforce allocation 37

Table 8: Cost assigned in activities of Decolgen Forte box 100 37

Table 9: Cost assigned in activities of Obimin box 30 38

Table 10: Status of product in process, May 2009 – DL 39

Table 11: Actual direct labor allocation, May 2009 40

Table 12: Actual unit cost, May 2009 40

Table 13: Details of Factory expenses of 2008-2010 42

Table 14: Factory overhead cost per hour 44

Table 15: Factory cost assigned to Decolgen Forte box 100 45

Table 16: Factory overhead cost assigned of Obimin box 30 46

Table 17: Status of product in process, May 2009 – FOH 47

Table 18: Actual FOH allocation, May 2009 47

Table 19: Actual FOH unit cost, May 2009 48

Table 20: Price variance from 2008-2011 49

Table 21: Historical data of exchange rate from 2007-2011 50

Table 22: Material usage variance 53

Table 23: Direct labor cost variance analysis 56

Table 24: FOH variance analysis 58 Table 25: Manufacturing cost controlling performance 59

LIST OF CHARTS

Chart 1: UIP Organization 24

Chart 2: UIP position on Vietnam Pharmaceutical market 27

Chart 3: UIP position on Vietnam OTC Pharmaceutical market 27

Chart 4: Allocation of Direct labor schedules 35

Chart 5: Allocation of factory overhead cost schedules 43

Chart 6: Manufacturing cost controlling performance 60

LIST OF ABBREVIATIONS

UIP: United International Pharma

SWOT: Strength, Weakness, Opportunity and Threat

PV: Spending variance

AQ: Actual quantity

AP: Actual overhead rate

SP: Budgeted overhead rate

EV: Efficiency variance

SQ: Standard quantity

O/H: Overhead

FIFO: First in first out

LIFO: Later in first out

OTC: Over the counter

COGS: Cost of goods sold

DL: Direct labor

FOH: Factory overhead

STD: Standard

R&D: Research & development

MO: Manufacturing order

UDC: Unit direct labor cost

UFC: Unit Factory overhead cost

EXECUTIVE SUMMARY

For a variety of business organizations and UIP without exception, finance is one of the most important managing activities in an organization as it helps the firm use its resource better and also measures the performance and development of a business Standing on the finance perspective, cost controlling attracts the most concern of the Board of Management of a firm And also out of that reason, this research studies and improves the current manufacturing cost controlling method of a business This work has analysed the manufacturing activities and its manufacturing cost controlling performance at UIP

The world economic crisis in year 2008 and in the following year 2009 has brought heavy effects on most of all countries in the world, also Vietnam in general as well

as UIP specifically because manufacturing resource input has become more and more difficult to find and expensive While inflation rate more or less 23% in year

2008 and higher in the following years, manufacturing cost at UIP was rather stable

at 46.7%, 49%, and 49.1% in the year 2008, 2009 and 2010 For that performance, this thesis explores these questions:

1 How UIP could control the manufacturing cost margin stable in the year 2009 and 2010

2 What lessons can be withdrawn from this situation and what can be applied to maintain the stable result for the future and for other branches of the company in Unilab group

This manufacturing cost control method was developed based on the literature of manufacturing cost behavior and cost controlling From the actual manufacturing

activities in UIP, material cost, direct labor cost, factory overhead cost and allocation method were identified and analyzed Actual data was compared with the budgeted data for the variance analysis in order to:

1 Determine the manufacturing controlling performance at a company

2 Figure out the manufacturing cost controlling experience

3 Withdraw valuable lessons for the company

The author also hopes this final project could address the above concerns of company’s management and to improve the current manufacturing cost controlling method in the year 2012 and 2013

This final project is conducted based on the secondary data from the internal information The data comes from the manufacturing report and P&L report of United International Pharma Moreover, internal interviews were also conducted to collect the practical solutions from key persons in charge of present manufacturing activities and finance at the company

Chapter 1 INTRODUCTION

United International Pharma(Vietnam) Inc, called as UIP, a manufacturer of different pharmaceutical products, is a wholly foreign owned company Pharmaceutical field has a highly potential growth rate in Vietnam However, during the financial crisis in 2008-2009, due to the shortage of materials, the price of all products and services is rapidly and significantly increasing Therefore, the profit margin of the company was decreasing accordingly To achieve the target performance, the company has been improving the efficiency, reducing the wastage

of the capital consumption and the revenue control It has been staying focused on controlling manufacturing costs which is an important part of company managing activities

Cost control is the most important matter in a manufacturing enterprise It affects the manufacturing costs, hence, the financial situation of the company as well Over the past three years, the manufacturing cost margin of the UIP was increasing year by year from 46.7% in 2008 to 49.0% and 49.1% in 2009 and 2010 respectively The manufacturing cost margin was strongly affected by the economic crisis in year 2008 and carried on to 2009 With other affecting factors, the issue has put the company on the risk of lossing its price competitiveness and can dampen the company’s market share gradually if the company leaves the matters in put The setbacks bring the issue up on the surface needed to be handled urgently to bring the company back to the previous healthy situation in terms of sound finance and good competitiveness

and to maintain the company’s situation on the market, UIP could strengthen the method to control the manufacturing costs The question is how UIP could do to

control the manufacturing cost margin stable in the year 2009 and 2010

When the economy begins to recover, identification of opportunities to improve profitability once again becomes the key priority to keep the company growing, expanding and winning To be able to re-invest to enlarge its operation and to maintain its achievement, the company has developing a better way of controlling its manufacturing cost

As much as for its necessity and urgency to take the issue further for being settled down, this project is also the motivation and encouragement to the author to take thecase into careful study and research

II STATEMENT OF THE PROBLEM

Profit margin of UIP is decreasing significantly due to the raise of manufacturing cost over the last three yearsfrom 46.7%in 2008 to about 49% in two years 2009, 2010 which records the lowest performance of the company’s financial situation in the past 3 years If being compared with the inflation in the year 2008 and 2009, it still shows an acceptable However, if this situation carried on for long, the company would not sustain the price competitiveness in the local market and would not be able to maintain the company’sposition on the market as well Hence, controlling manufacturing cost is the main important way to improve the company’s profit margin and financial performance within the present context

III OBJECTIVES OF RESEARCH STUDY

Followings are the key objectives of the research:

First of all, the manufacturing costs behavior will be identified by analyzing components of manufacturing costs

Secondly, the actual manufacturing situations will be analyzed using measurable methods This will be done by studying actual costing process of the company

Finally, based on the variance analysis of estimated versus actual of the manufacturing cost determined the manufacturing cost controlling and withdrawn valuable lessons for better controlling manufacturing costs at UIP

IV SCOPE AND LIMITATION OF RESEARCH STUDY

This research focuses on the analysis of the manufacturing costs and manufacturing costs controlled at the UIP from 2008 to 2010, and then coming up with the solutions

to improve the financial status of the company so as to be stable, which help maintain its competitive advantage in the local market

Qualitative analysis: It includes summaries, comparisons and analysis of the manufacturing components and activities to come to the suitable solutions and

suggestion for the company to improve its present thethods of controlling manufacturing cost

Internal interview: collecting the practicable of solution by interview some key person in UIP

VI ORGANIZATION

The structure of report includes four chapters:

Chapter 1: Introduction: This part identifies the existing problem, the objectives and methodology of the research

Chapter 2: Literature review: This part covers the concepts and definitions about the cost control and manufacturing costs behavior

Chapter 3: Information on UIP and its manufacturing activities: This part presents information related to the UIP such as organization, company culture, products and its position on the market One of the most important parts of the chapter is the financial status of UIP and its cost structure as well as the manufacturing cost analysis of the company

Chapter 4: Findings discussion: This part shows some findings of the research and further discussion around company activities which impact on manufacturing costs

Chapter 5: Conclusions and Solutions: This last part points out the result of the research, what needs to be done and lesson to be learn to improve the manufacturing

costs controlling method at UIP

Chapter 2 REVIEW OF RELATED THEORY &LITERATURE

I Cost Definition and classification:

1 Definition:

Cost is the amount of money, time, or energy required to obtain or produce something It may be considered the total spent for goods or services including money, time and labor (http://www.thefreedictionary.com/cost).

Every factor of production has a cost associated with it: material, labor, electricity, water, rent… , for example, the labor cost used in the production of goods and services is measured in terms of wages Costs of electricity, water, and rent… are called expenses or production overhead In that aspect, there are three basic cost elements in manufacturing cost which are direct material cost, direct labor cost, and overhead

2 Classification of the cost:

There are many ways to classify product cost such as classification by nature, by tracibility, by function, or by behaviors In the mean time, cost classified by nature includes material cost, labor cost and expenses; while by tracebility, it is including direct costs, indirect costs, and general and administrative costs; where as by nature means it is associated with learning how costs change when there is a change in an organization’s level of activity The costs which vary proportionately with the changes in the level of activity are referred to as the variable costs, while the ones that are unaffected by changes in the level of activity are classified as fixed costs Moreover, if costs are classified by its function, it involves classifying costs as

production or manufacturing costs, administration costs or marketing and selling and distribution costs

Besides that although there are many other ways to classify cost of products or services such as avoidable cost, unavoidable cost, controllable cost, uncontrollable cost, and discretionary cost; in this context, it is concentrated on the manufacturing

cost or cost classified by its function which are material cost, labor cost and expenses

or production overheads

II Cost control:

1 Definition of cost control:

Cost control, also known as cost management, concerns itself with the control of the flow of costs Manufacturing cost controllers of different manufacturing firms may be various at each place; however, their basic methods remain similar: they manage and control costs of all manufacturing overhead, material and labor cost; they help to conduct performance management in the overall planning process; and also help set prices for labor and material; and determine inventory valuation as well

2 The role of cost control:

It is that the customers can bring up the revenues but only doing good cost control can improve the bottom-line of the profit, and profit is everything that any business are looking for in order to survive This can be done by being able to adopt a much more effective method for cost control to enhance the profitability A cost control system can bring immediate savings and ensure that you remain competitive in the long run To view from this side, the cost control shows its important management role in the operation of the business

Normally, the cost control department does the consolidation, statistics and analysis

of the actual cost of all the activities, they point out where the company is staying, how high the target be aimed to, how they did, whether or not they did efficiently which help the manager decides if any adjustment for the short-term is needed Hence cost control plays a very important role in the business activities

3 Factors affecting the cost control:

Inter nal factor

There is always an interaction between many factors affecting an organization business The cost control itself affects directly to the bottom line of the business, as much as it affects the business, the business itself vice versa affects the cost control

in as well in many different ways The company’s system, like the business objective, the business activities, the historical data of the business, the mission, the vision… define the cost control system of a company In fact, the activities of the company will determine the standard cost or the budget cost for each item

External factor

An organization existing in the economy has many pressures due to many of its limitations and barriers Those are the competition, the regulations, the inflation, the economy situation, even the invention of sciences or the technology development For example, the inflation bring about the price increase, as a result of this, the business has to spend more for its expenditure The competition pressure on the good sources of material, and if there’s the new source of materials to be in use, the price

of a product can be reduced

4 Cost management:

Dr ManojAnand summarized the empirical studies on usage of traditional costing method that can be used as the cost management tools such as standard costing, transferring price and manufacturing cost accounting While Blocher et al (1999) lists down some key tools of strategic cost management: value chain analysis, activities based costing, competitive advantage analysis, target costing, just-in-time inventory, SWOT analysis, benchmarking, balanced score card, theory of constraint and continuous improvement In John K Shank defined three themes of the strategic cost management: value chain analysis, strategic positioning analysis, cost diver analysis

In essence, those findings are not conflicting witheach other, they are different ways

to review and resolve problems of a factory cost and in general, all of those tools are within the managerial accounting managing methods

4.1 Standard costing method:

Govindrazan and Shank (1992) defined that standard costing as a management control tool, which has been popularly used over the world

It is a predetermined estimated unit cost, used for inventory valuation and control It’s also a control technique which compares standard costs and revenues with actual results so as to obtain variances used to improve performance To make it clearer, the difference between standard and actual cost is known as a variance It is therefore most suited to mass production and repetitive assembly work

Performance standards are used to set efficiency targets According to the standard costing theory written in the management accounting book published by BPP Learning Media Ltd in 2007, There are four types of standards such as ideal, attainable, current and basic which are explained below in the following table:

Type of standard Description

Ideal These are based on perfect operating

conditions: no wastage, no spoilage, no inefficiencies, no idle time, no breakdowns Variances from ideal standards are useful for pinpointing areas where a close examination may result in large savings in order to maximize efficiency and minimize waste However ideal standards are likely to have

an unfavorable motivational impact because reported variances will always be adverse Employees will often feel that the goals are unattainable and not work so hard

Attainable These are based on the hope that a standard

amount of work will be carried out efficiently, machines properly operated or materials properly used Some allowance is made for wastage and inefficiencies If well-set they provide useful psychological incentive by giving employees a realistic, but challenging target of efficiency The consent and co-operation of employees involved in improving the standard are

required

Current These are based on current working

conditions (current wastage, current inefficiencies)

The disadvantage of current standards is that they do not attempt to improve on current levels of efficiency

Basic These are kept unaltered over a long period

of time, and may be out of date They are used to show changes in efficiency or performance over a long period of time Basic standards are perhaps the least useful and least common type of standard in use

(Source: ACCA F2, by BPP Learning Media Ltd in 2007)

Which type of standard chosen to be used depends on the real situation at the company as in fact, ideal standards, attainable standards and current standards each have their supporters and it is by no means clear which of them is preferable

4.2 Variance analysis:

Variance analysis is the process by which the total difference between standard and actual resultsn is analysed To put another way, variance analysis looks after-the-fact

at what caused a difference between plan versus actual

Variances being analyzed in the study can be divided into the main groups

 Direct material cost variances

 Direct labor cost variances

 Variable and fixed production overhead variances

4.2.1 Direct material cost variances:

Direct material total cost variances can be subdivided into the direct material price variance and direct material usage variance According to Wikipedia, direct material price variance is defined as “the difference between the standard cost and the actual cost for the actual quantity of material used or purchased It is one of the two components of direct material total variance”

For example, Product X has a standard direct material cost as follows

10 kilograms of material Y at $10 per kilogram = $100 per unit of X

During period, 1,000 units of X were manufactured, using 11,700 kilograms of material Y which cost$98,600

The direct material price variance is computed hereby:

$ 11,700 kgs of Y should have cost (X $10) 117,000

The variance is favourable because the material cost less than it should have

The direct material usage variance:”This is the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used, valued at the standard cost per unit of material In other words, it is the difference between how much material should have been used and how much material was used, valued at standard cost” (ACCA F2, Accounting management, BPP Learning Media Ltd 2007)

To be continued with the above example, the direct material usage variance is calculated as follows:

1,000 units should have used (X 10 kgs) 10,000 kgs

The variance is adverse because more material than should have been used was used

In summary, total variance will be:

$

4.2.2 Direct labor cost variances:

Similarly, the direct labour total variance can be subdivided into the direct labour rate variance and the direct labour efficiency variance While direct labor rate variance is the difference between what the labour did cost and what it should have cost, direct labor efficiency is the difference between how many hours should have been worked and how many hours were worked, valued at the standard rate per hour

The way to calculate the direct labor variances is similar to the computation of direct material variances

4.2.3 Variable and fixed production overhead variances:

The formulas for splitting the flexible budget variance for variable overhead into a

“price” variance and an “efficiency” variance are the same as the formulas for direct materials and direct labor

According to Professor Dennis Caplan (Oregon State University,

http://classes.bus.oregonstate.edu), cost variances for production overhead is explained as follows:

Variable production overhead variances:

“The price variance for variable overhead is called the variable overhead spending variance:

The Fixed Overhead Volume Variance:

The fixed overhead volume variance is also called the production volume variance, because this variance is a function of production volume The volume variance attaches a dollar amount to the difference between two production levels The first production level is the actual output for the period The second production level is the denominator-level concept in the budgeted fixed overhead rate, expressed in units There are two common choices for this denominator:

(1) budgeted production

(2) factory capacity

The interpretation of the volume variance depends on which of these two denominators are used, but in either case, the production volume variance is the difference between budgeted fixed overhead (a lump sum), and the amount of fixed overhead that would be allocated to production under a standard costing system using this fixed overhead rate

) 

budgeted fixed overhead

budgeted production

The term in parenthesis equals the amount of fixed overhead that would be allocated

to production under a standard costing system, when budgeted production is the denominator-level concept”

4.3 Controlling cost:

4.3.1 Controlling mate rial cost:

As being defined that material is the substance or substances from which a thing is made Materials may be made out of one or more substances, for example: wood, plastic, metal, wool and so on, or a combination of substances In practice however, materials can really come in as bags, packets or by the thousand Besides that, material may be distinguished by one or more of the features such as colors, shape, fire resistance and water resistance

Managing cost of material is not confined in managing cost of raw material but also managing of material inventories It includes the process of material requisition, valuing materials and inventories and controlling material in stock

All factories have to buy material for manufacturing process Large businesses have specialist buying departments managed by people who are very skilled at the job In spite of it, the essence of a buying transaction is farely simple, it starts from the material in need to finding out the suitable supplier who can provide the best items in terms of material cost, good quality in time and with good credit policy for the company

When materia issued for producing from the inventory, it can be valued using FIFO, LIFO and weighted average method The main point is also about the cost of stock inventory Holding stock means that the business will generate cost, from the cost of space to cost of employing people to look after it Therefore, ideally its best to buy

exactly the right quantity at the right time with the right quantity to make those many items to be in used immediately so as to be left with no inventories of finished goods, work in progress or raw materials This is known as the just-in-time (JIT) approach, that is, the just-in-time purchasing of inventories to meet just-in-time production of material in need for being processed

From the costing point of view, controlling material cost with its important part is

controlling inventory As definition, “Inventory control is the regulation of inventory levels, which includes putting a value to the amounts of inventory issued and remaining Inventory control also includes ordering, purchasing, receiving and storing goods” (Accounting for cost, CAT Paper 4, published by BPP Learning

Media Ltd in 2007)

Reordering inventory:

The problems of when to reorder inventory and how much to reorder are the most significant practical problems in inventory management Inventories have to be reordered before they run out completely, There’s the formula to compute the level

to reorder material in stock as follows:

Reorder level = maximum usage × maximum lead time

The example following explains how the function works: A business has recorded for

a period that it consumes a maximum material amount of 300kg per day within the longest time is 4 days Therefore, we can calculate the level of stock that the business has to reorder is: Reorder level = 300*4=1,200(kg)

This figure shows how low inventories can be allowed to fall before another order should be placed and in this case, the lowest level of material the business can stand

is 1,200kg before there’s a new order should be made

In the above case, when the business stock reach the level of 1,200kg The purchasing department should make another order for the material needed but how much they are going to order Therefore another formula being taken into consideration is reorder quantity The reorder quantity is the quantity of inventory which is to be re-ordered when inventory reaches the reorder level

Economic order quantity, or EOQ : Q = 2C0D

CH

where CH is the cost of holding one unit of inventory for one year

CO is the cost of ordering a consignment

D is the annual demand

Q is the 'economic order quantity' (EOQ), that is, the best amount to order

From the above literature, controlling material cost is controlling the price of material purchased, as well as the material in stock

4.3.2.Controlling labor cost:

As definition, labour costs can be determined according to the prior agreement, the amount of time worked or the quality of work done It can include any or all of these components:

 The gross amount due to an employee

 Employer's national insurance

 Amounts paid to recruit labour

 Amounts paid for staff welfare

 Training costs

 The costs of benefits like company cars

Labor cost includes but not excludes salaried labor with or without its benefit package as mentioned before, idle time, overtime, bonus, and absense In some enterprises, salaried staff is asked to fill in a detailed timesheet about what they do every hour of the day, as their basic pay is a flat rate every month

Controlling labor cost is also controlling the idle time Although through no fault of their own, employees cannot continue their work sometimes due to the machine break down or the shortage of work, and due to many other reasons in the factory Idle time has a cost because employees will still be paid their basic wage or salary for these unproductive hours

Overtime premiums are paid to encourage staff to work longer hours than normal A company with a high percentage of payment for absense, turnover as well as for bonus package is a sign of low productivity and inefficient management Therefore, there are ratios to manage the labor productivity at work which includes labor

turnover rate, labor efficiency, capacity ratio, and production volume ratio(Appendix A)

In short, managing labor cost willl also include managing wages of manufacturing labor with their benefit packages and duties, managing the idle time as well as the efficiency at work

4.3.3 Controlling Production overhead:

As mentioned before, production overhead is any cost incurred in order to create a product which cannot be traced in full to that product, service or the department

This usually includes costs of renting, utilities, equipments, maintenance and indirect labor Indirect materials such as scrap are also classified as overhead

And besides as being unable to be traced in full for calculating costs of products, absorption costing is used as a method of including in the total cost of a product or service an appropriate share of the organisation's total overhead An appropriate share means an amount that reflects the amount of time and effort that has gone into producing the unit of product or service

One of the steps involving in calculating the costs of overheads to be charged to cost units is cost allocation technique Cost allocation is the process of identifying and assigning the costs of services necessary for the operation of a business or other type

of entity Unlike a cost rating, the allocation is less concerned with the actual amount

of the cost, and more concerned with allocating or assigning the cost to the correct unit within the organization From this perspective, cost allocation can be seen as a tool that helps track all costs associated with the ongoing operation more efficiently, since each cost is associated with specific departments or groups of departments within the organization (http://www.wisegeek.com/what-is-cost-allocation.htm, date 17 Oct 2011)

Take the example of the data about costs of a company:

Wages of the manager of Department A

Wages of the manager of Department B

Indirect materials consumed in department A

Rent of the premises shared by Department A and B

$2,000

$1,500

$60

$400 The accounting system will include the three overhead cost centers hereby:

Cost center 12 Department B

Overhead costs would be allocated directly to the cost center, $2,000+60 to cost center 11, $1,500 to cost center 12 and $400 to cost center 21 The rent of the factory will be subsequently shared between the two production departments, but for the purpose of day today cost recording The rent will be charged in full to a separate cost center

In conclusion overhead is part of the cost incurred in the course of making a product, providing a service or running a department, which cannot be traced directly and in full to the product, service or department To calculate the cost of overhead incurred, absorption costing is a method of sharing overheads between a number of different products or services on a fair basis This method involves the allocation, apportionment and absorption

Chapter 3 UIP AND ITS MANUFACTURING ACTIVITIES

I United International Pharma Inc (UIP):

1 Mother company – United Laboratories, Inc (Unilab):

In 1945, a small drug store was established in Sto Cristo and Jabones Streets in Binondo, Manila Jose Y Compos, Mariano K Tan and ArsenioOng are the founders

of the United Drug Company

After a few years, the company was developing into a manufacturer on the healthcare market and providing solutions through a broad line of prescription over the counter and nutritional products

By the end of the fifties of the last century, Unilab was the top pharmaceutical company in Philippines Its business is broadened over the Southen Asia Since then, Unilab has been presented in Indonesia, Thailand, Singapore, Hokong, Malaysia and Vietnam

2 UIP organization:

Chart 1: UIP organization

3 UPI Vision – Mission – Value:

BUSINESS

DEVELOPME NT

(UIP in Vietnam)

4.3 Ethical channel

5 UIP position on Vietnam pharmaceutical market:

For quarter 4 UIP was ranked at 16th on total Vietnam pharmaceutical market (follow the market research company) In reality, the strong business of UIP is OTC (over the counter) products with the 2nd position in the market and the Ethical (need doctor’s description) products as the developing business

Chart 2: UIP position on Vietnam Pharmaceutical market (*)

(*) Source: IMS – Q4-2010 Vietnam market report Chart 3: UIP position on Vietnam OTC Pharmaceutical market (*)

(*) Source: IMS – Q4-2010 Vietnam market report

6 The UIP’s financial status:

Table 1: Profit & Loss of UIP from 2008-2011

2010, the materials cost and direct labor cost increased by 0.6 and 0.2 respectively Fortunately, factory overhead cost reduced 0.6; therefore it is compensated for the increase of materials and direct labor It is resulted in the COGS being almost stable

in year 2009 Besides that, the operating profit went down by 1.3, and gained back by 0.4 in year 2010 The lower operating profit mainly came from the higher COGS in the year 2009 In year 2010, general administration expenses reduced by 0.6, however it was mostly set off with the increase of the selling expenses and the