Identify various responsibility centers-cost centers and profit centers in apharmaceutical company and commenthow they affect the managementdecision making.Submitted byRitikaShrutikaNidhiNidhi choudhriNeharhythm
Business Overview As of today, Ranbaxy, Indias largest pharma company and the 12th-largest generics maker in the world Ranbaxy Pharmaceuticals Inc. (RPI), a wholly owned subsidiary of Ranbaxy Laboratories Limited. (RLL), was established in the U.S. in 1994. RLI has been expanding and growing on the strength of Ranbaxy’s R&D efforts, and continuing exploration of novel drug delivery systems (NDDS), licensing activities, mergers and acquisitions. Ranbaxy has positioned itself as a robust and capable player in the U.S. market through the combined commitment of RPI and RLI to developing new and innovative products .
Continued… RLI is expanding the visibility and presence of the Ranbaxy name by bringing value-added brand products to the market.
Responsibility centre In simple words: an organizationalunit for which a manager is maderesponsible.Goals for the center should be specificand measurable, andShould promote the long termsinterests of the organization andshould be compatible with otherresponsibility center activities.
Types of Responsibility Centers Investmen Profit -t centre centre Revenue centre Cost centre
Question is :- what is Cost centre & Profit centreand how they affect the managementdecision making process.
Cost center It may defined as any location, person or item of equipment for which cost may be ascertained & used for the purpose of cost control. An identifiable part of an organisation where costs can be calculated. Parts of cost centre Research & Production Operation development cost centre cost centre cost centre
Contract Manufacturing To expand product lines with minimum investment, Ranbaxy provides turnkey manufacturing services, including API and dosage form development, to allow companies to focus on marketing and selling the product.
Development and Production Ranbaxy can provide Active Pharmaceutical Ingredients (API) for companies that want to manufacture their own product or brand without incurring the time and costs associated with developing the API, eliminating this step from the overall manufacturing process. Key advantages of using Ranbaxys vertically integrated system are or Continuity of supply Helps In managerial decision making by Consistent quality of product Competitive costs Flexibility and resources to respond to changing market dynamics
Profit centre An identifiable part of an organisation where costs and revenue can be calculated Managers of profit centers control both the revenues and costs of the product or service they deliver. Cost for these units vary depending on ability to control labor, waste, and hours. An identifiable part of an organisation where costs and revenue can be calculated.
Parts of Profit centre Sales & marketing Marketing strategy Licensing
Marketing Strategies In Ranbaxy, Marketing Strategies is the department focused primarily on developing and executing strategies for the promotion and distribution of branded, generic and OTC products for RPI. One of the key tasks for the department is to identify opportunities in different markets and distribution channels and pursue those to developing and establish new relationships in the marketplace.
Licensing RPI prides itself on taking a creative, mutually beneficial approach to licensing arrangements. The company is open to exploring both outward and inward licensing opportunities to fulfill unmet needs in the marketplace.
Cost center Profit centre Cost centres are the Profit centres are that smallest segment of activity segment of activity which is or area of responsibility for both responsible for which costs are Revenue and expenses accumulated or and disclose profit of a ascertained. particular segment of Cost centres are created activity. for accounting convenience Profit centres are created A cost centres does not to delegate responsibility to have target cost , but individuals. efforts are made to Each profit centre has a minimize cost profit target.There may be number of cost centres in a profit centre. All profit centres are cost centres but all cost centres are not profit centres.
Cost centres and profit centresThe Disadvantages of Becoming A Global Operator Decision making becomes centralised As the company grows the decision makers become isolated and lose touch with the customers Increased size makes communications and decision making much more complex The company loses touch with the market place and becomes de- sensitised to changes occurring within the external environment The company becomes complacent and loses its innovative drive
Ranbaxy– Master Budget (Fixed)Prod.1 Prod. 2 Prod. 3 Prod. 4 TotalUnits made 245,000 385,000 636,000 1,250,000Units per batch 500 2,500 1,500 5,000No. of batches 490 154 424 250Cost per unit $ 5.40 $3.20 $4.25 $1.45Cost per batch $325.00 $680.00 $400.00 $135.00Unit-related costs $1,323,000 $1,232,000 $2,703,000 $1,812,500 $7,070,500(245,000x$5.40)Batch-related 159,250 104,720 169,600 33,750 467,320costs(490x$325)Prod.-sustaining 125,000 168,000 256,000 355,000 904,000costsFacility costs 1,450,000Total cost center $9,891,820costs
Ranbaxy– Actual CostsUnits made 2,945,000 345,000 675,000 950,000Units per 600 2,300 1,800 6,000batchNo. of 492 150 375 159batchesCost per unit $ 5.43 $3.18 $4.33 $1.40Cost per $335.00 $670.00 $387 $144.00batchUnit-related $1061,850 $1,097,100 $2,922,750 $1,330,000 $6,951,700costsBatch- 164,820 100,500 145,125 22,896 433,341related costsProd.- 133,000 163,000 259,000 362,000 917,,000sustainingcostsFacility costs 1,650,000Total cost $9,952,041center costs
What do we learn from thevariance analysis of Ranbaxy The variance analysis presents a mix of positive and negative variances. Example: Product 1 and 3, unit-related costs were higher than planned, and For products 2 and 4 they were lower than planned.
What did we learn from thesecontrol system illustrations? All responsibility centers evolve from the concept of “controllability.” Controllability principle states a manager should be assigned responsibility for the revenue, costs, or investment that he/she could control. Revenues, costs, or investments that do not fall under a manager’s control must be excluded when evaluating the manager or his/her center. Problem with this concept: In most organizations, many revenues and costs are jointly earned or incurred and differentiating the controllable from the uncontrollable is
How its helpful in decision making They allow a more focused study of a firms finances. Benchmarking can take place. It help cost accountants specify the quantity and price standards for the materials, labor, energy, and machine time required to produce each gadget. Planning future profit performance.
Continue . . . By placing responsibility with the person involved in the activity the finances may be run more efficiently than would be the case if a more remote, senior manager controlled it. Many operating unit managers have responsibility and authority for both production and sales. They make decisions about what products and services to produce, how to produce them, their quality level, price, sales and distribution systems by evaluating profits.
A simple summary of theresponsibility centers Output measured in Revenue centre monetary terms Input measured in Expense/cost centre monetary terms Output measured in Profit centre monetary terms Output measured in Investment centre monetary terms