Digg It - Business

The short answer to this question is, "Everything". Information provided by the costing system determines how the business is managed, what product opportunities are pursued, what price is charged and so forth. W

According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product

hat if the information paints a misleading picture? It simply means wrong decisions will be made, wrong behaviours will be rewarded, and in time the business will decline. Just how real is this possibility?

D

; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.

Examples of combination products may in

istortions of the Traditional Cost World:

Surveys of organisations worldwide show that over 50% employ standard costing while close to 40% use marginal costing in their internal accounting. Standard costing

lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.

- the more widely used method - possesses well known shortcomings that can drive wrong behaviours. Specifically, by incorporating fixed costs into product costs on a volume, direct labour or machine hour basis, i

here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe

t encourages high inventories (since high production volumes lead to an over-absorption of fixed costs and high inventory valuation, which causes cost of sales to seem low and thus leads to high reported paper pr

d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.

Combination pro

ofits).

However, it is simple common sense (lately emphasised by proponents of lean and TOC methods) that the company only actually makes money when the products are purchased and paid for, not when they sit in

ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc

finished goods stores.

Lean Accounting:

Lean focuses on increasing speed and reducing waste, both of which have the effect of reducing inventories. Indeed the ideal in the lean world is continuous flow.

easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi

oods are produced just in time, and thus minimal inventories are held. TOC relaxes the no inventory rule by allowing some protective buffer inventories for the constrained resource and at the finished goods end.

nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically

Even so, emphasis is on low inventories.

It was obvious to the originators of lean (Toyota) and TOC (Eliyahu Goldratt) that traditional accounting could not support or drive their process based systems. Alternat

and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ

ives were needed.

Learning Your ABCs:

Activity Based Costing was invented in the 70s and 80s and offers a more accurate method of allocating indirect costs on the basis of cost drivers. These drivers are

ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi

activities carried out in the course of producing the good or service. Each product is allocated costs to the extent that it consumes the relevant driving activity.

By allocating costs on a more accurate basis,

ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.

Following aspects would a

ABC mitigates some of the shortcomings of traditional accounting. In particular, it helps in the proper assignment of the cost of complexity. Complex to make products or services bear their full cost of producti

dd to the challenges in developing combination products:

Which markets to tap where the combination products can do fairly well?
Which combination prod

on and so the business can price them properly in the market or discontinue them. There is an incentive to eliminate product and service complexities that are not visible to or valued by the customer.

Put You

cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin

rself through the Throughput World:

Throughput accounting arose directly from the Theory of Constraints. It recognises that the constrained resource is what determines how quickly the product moves through t

tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen

e value chain from the suppliers through internal processes to the customers or the rate at which money comes into the business in exchange for goods or services. The relevant variables in throughput accounting a

t?

As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel

re throughput (T), inventory (I) and operating expense. Inventory represents money spent on things intended for conversion to throughput, while operating expense (OE) is the amount required to convert inventory t

ping new procedures for reviewing their safety, efficacy and quality.

Professional from academic institutions, pharmaceutical industries, health care indust

o throughput.

The aims of this system, in order of importance, are to provide management with information that enables the maximisation of throughput (T), while reducing inventory (I) and operating expense (OE).

y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products

Decisions are evaluated on the basis of their impact on the following system wide metrics:

Net profit (NP) = T-OE
Return on Investment (ROI) = NP/I
Productivity = T/OE
Investment turns = T/I
.

As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
i>

Conlusion:

Adoption of business process thinking requires information systems that support actions leading to high throughput, low waste and low inventories. Traditional accounting systems with their
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.

Companies that provide selfless information through particip
focus on local (rather than system wide) efficiencies, and cost minimisation often lead to decisions at variance with lean and throughput thinking, and can delay the potential gains obtainable from their adoption

tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products

Tags

Links

Digg It - What Does Accounting Have to Do With Process Improvements?

Related Articles: