Hi,
I have a project at hand to be completed in two months and I really am clueless about how to approach it.
I am working in a startup business, which has started its operations a year earlier. They want to refine the costing method which they are using. I have to critically analyse the current system, suggest the new methods, tell the feasibility and justify the advantages of the new system. I want to get different approaches from all of you to do the same.
The brief background is like this.
The company does packing, storage & distribution of drugs for clinical trials. For a typical year, the company finds the budgeted sales and accordingly finds the cost of sales. Then each process, viz. packaging, storage & distribution is allotted a fixed percentage as to how the costs should be allocated. Since it was the first year, there was no idea as to how to allocate these percentages and hence it was entirely judgment based. The cost is then apportioned according to the percentages set.
The factory O/Hs, direct labor, admin O/Hs etc are allocated to each process by again fixing a different percentage to each process (e.g. technicians salary is divided as storage - 10%, packaging – 70%, dispatch – 20%). Each percentage is different.
In the second stage, cost per unit of cost driver is identified for each process (e.g. for storage, the cost per sq-feet area is found by dividing the cost apportioned to process by the area of space. The plant is assumed to be running on full load throughout the year, which may not be the actual case). This cost per unit cost driver is used to calculate the estimated cost of each project, which the company gets throughout the year. A set margin is added each process cost (which is different for each processes ranging from 50% to 100%) and the price for the project is quoted to the client. It may happen that the company once again adds a margin on the entire project price.
In the entire operations, nearly all the costs are fixed in nature. There is no significant labor required and the only variable cost which would be there is of the packaging material consumed, which is again very small.
Now the projects which the company gets may not have all the processes of packaging, storage & distribution involved. It may get a combination of this, like only storage, packaging & storage, packaging & direct distribution etc., the composition of the projects is unknown beforehand.
The problem is if only a certain type of project comes in large number in the entire year (say only storage) then the costs allocated to the other processes are not recovered.
Also right now the company has the luxury to set heavy margins for each process, before quoting its price to the client, which takes care of the uncertainties. But as time progresses, it’ll have to be more accurate to actually find the costs absorbed and the revenue expected per process. There may be more potential problems, which I am not able to visualize.
This is just a brief of the entire project. I want to know the improvisations possible in this system. If any further information is required, please do tell me so.
I really want help on this, since this is a heavy task for me. Looking forward for some urgent help.
Thanks & Regards.
Aashutosh.

Sorry I am not able to help you right now, if got the solution in future I will definitely let you know.

whoah!! seems complicated for me..

whoa you can ask a financial analyst to help you out