Management and Cost Accounting Pharmaguard Limited

Question: Discuss about the Management and Cost Accounting for Pharmaguard Limited. Answer: Introduction Pharmaguard wants to take up the Activity Based Costing into its activities that will involve every section from the retail section, the manufacturing department and the marketing department. Consulting the Delots Management team in regards to the implementation of the ABC costing method from the conventional method they have been using in the organization. This is a change from the method they have been using of the gross margin percentage, they would want to have a better hold in the profitability of its activities as well as track every activity that happens in the organization. The computation and analysis calculates the comparison between the older method that they use to the new one that the management wants to introduce. Computations and Analysis This section contains the computation of gross margin percentage and the Activity Based Costing for Pharmaguards retail operations. All calculations fall in the Part I of the report. The 2015 gross-margin percentage for each of Pharmaguards three market segments. General supermarkets chains Gross-margin percentage= (108000/3708000)*100= 2.91% Pharmacy chains Gross-margin percentage= (150000/3150000) *100 = 4.76% Pharmacist owned single stalls Gross-margin percentage = (180000/1980000) *100 = 9.09% Cost driver rates for each of the five activity areas. Cost driver rate = total cost of activity/ activity cost driver Order processing ------ No. of purchase orders Activity cost driver---360+140+1500= 2,000 Total activity cost= 80000 Cost driver rate----80,000/2000= 40 Line item processing-------No. line items ordered Activity cost driver----1960+ 4320+15000= 21280 Total activity cost= 63840 Cost driver rate------- 63840/21280=3 Delivering stores--------No. of store deliveries Activity cost driver------120+ 360+ 1000=1480 Total activity cost= 71000 Cost driver rate-----71000/1480=47.97 Cartons shipped to store--------No. of carton shipped Activity cost driver-------36000+24000+16000= 76000 Total activity cost= 76000 Cost driver rate-----76000/76000= 1 Stocking of customer store shelves-----shelf stock hours Activity cost driver--------360+180+100= 640 Total activity cost= 10240 Cost driver rate------10240/640= 16 Use the activity-based costing information to allocate the $301080 of other operating costs to each of the market segments. Compute the operating profit for each market segment. The General supermarket chains (Table 1) Activity Cost driver rate (a) Transactions (b) Amount (a*b) Order processed 40 140 5600 Line-items ordered 3 1960 5880 Store deliveries made 47.97 120 5756.4 Cartons shipped to store 1 36000 36000 Shelf- stocking 16 360 5760 Total overheads 58,996.4 Pharmacy chains (Table 2) Activity Cost driver rate (a) Transactions (b) Amount (a*b) Order processed 40 360 14,400 Line-items ordered 3 4320 12,960 Store deliveries made 47.97 360 17,269.2 Cartons shipped to store 1 24000 24,000 Shelf- stocking 16 180 2,880 Total overheads 71509.2 Pharmacist- owned single stores (Table 3) Activity Cost driver rate (a) Transactions (b) Amount (a*b) Order processed 40 1500 60,000 Line-items ordered 3 15000 45,000 Store deliveries made 47.97 1000 47,970 Cartons shipped to store 1 16000 16,000 Shelf- stocking 16 100 1,600 Total overheads 170,570 Operating profit for each market segment (Table 4) Pharmaguard Ltd, 2015 General supermarket chains Pharmacy chains Pharmacist-owned single stores Pharmaguard Ltd Revenues $3 708 000 $3 150 000 $1 980 000 $8 838 000 Cost of goods sold 3 600 000 3 000 000 1 800 000 8 400 000 Gross margin $108 000 $150 000 $180 000 438 000 Other operating costs 58996 71509.2 170570 301075.2 Operating profit $49004 $78490.8 $9430 $136 924.8 According to the results obtained or achieved from implementing the activity based costing, it is noted that the total operating profit increases slightly after computation from $136920 to $136924.8. As a result it is appropriate to comment that ABC method is the most accurate approach for determining the cost of activities performed in the retail operations of Pharmaguard Limited. In addition, activity based costing has aided in allocating the other operating costs to each market segment that are incurred during retail operations hence determining the operating profit in each market segment. Discussion and Substantiation Employees may resist the implementation of the Activity Bases Costing method in their three departments for their own personal reasons. First it is important to understand that people resist change as they feel any change to what they were accustomed to in the beginning might distract their normal functioning (Considine, Krahel, Lenk, Janvrin, 2015). A change brings about many other changes that may explain their resistance to the change. There is also the possibility that the employees might resist the change as they do not know the effect of the implementation of the costing method on their jobs. Some of the resistance may stem from the ignorance on the benefits and advantages that may attribute to their specific departments after the new change. The method may also distract the way the employees have been used in the normal application of all processes in the organization from the purchase to the dispatch of every item. Such tracking of all activities in the organization using the ABC method and the possibility in assigning the overhead costs to the indirect costs may contradict the normal functioning of the three different departments and the way they interrelate with each other (Everaert Bruggeman, 2007). The identification of each cost to the activity that happens in the each department may confuse the employees. This may happen in the system if it captures a transaction that should not be classified in the costing. This may lead to more complications when calculating the costs and revenue realized at the end of the financial years. On the other hand, the Activity-based Management will help in the identification and the evaluation of all the activities that will happen within the organizations and more specific in all the departments. According to management, this works hand in hand with the Activity based costing as it facilitates the analysis of the value chain and identification of any change that affects the normal functionality of the operations (Drury, 2013). The resistance feel that the company does not need any change at all as they feel they have been doing all their roles in the right way opposing the idea from the management that the ABC implementation would help in rectifying any mistake they make after the implementation. This means that the management will leave all the implementation to the employees and it is a tedious process which may little or no effect to the employees workload. The employees resistance may stem from the amount of time they may have to spend inputting the information in the system which may attribute to wasting a lot of constructive time that they would have used in other activities. Ten assigned cost per activity may also increase considerably as they have to confirm that they have the right inputs. For instance, the staff at the retail section may have to spend more time in capturing all the information from the daily activities and the transactions that happen there since it is a busy day to day activity (Kaplan Porter, 2011). They may also feel that the management does not consider the complexity of their daily operations which they have to perform every day at their workplace. The complexity lies from the handling of the customers from the beginning to the delivery of the services this is in regards to all the departments. The process of transforming the organization from the old way that it does its activities may take a longer time than anticipated which may distract the normal duties that the employees undertake on a daily note making the organization lose some businesses. Employees may argue that they are missing out on doing their different job descriptions making it hard from them to execute their duties (Considine et al, 2015). The tacking of each activity may prove wastage of precious time unlike in the traditional way where they manually kept track of all activities and cartons of medicine moving in and out of the organization. The management may justify the need to have the change and adopt the ABC method through the many advantages that the firm will gain (Schffer, 2008). They acknowledge that the transition may be a tedious process for them but may prove worthwhile at the end of the period after the process picks up and the organization starts enjoying the benefits from the costing method. Having a working model will help the management in getting real time reports and access the reports at any time that they might need the reports without distracting the activities in the organization. This will help in the long-run as the employees are aware that the management might require the reports at any time. Recommendations and Conclusion Pharmaguards decision to take up the Activity Based Costing method in their operations is a decision that will affect the way the functions of the pharmacy. It will have to adapt to the many changes that will happen and the most important thing is that the staff and the management change with the changes that the ABC method will have. From a professional point of view, there are many benefits and limitations that will come with the adoption of the method. It is important to know of the expected changes through the transition (Horngren, 2009).One of the major advantages that the organization will benefit from the incorporation of the tool is that it will have a better management in all the activities that happen in all the different operations. The management will have a clearer overview of the organization and will measure the performance of the business hence making comparisons between different periods. The tracking down of each product and process involved will help in improving t he quality of the products and improve on their design for better packaging. The organization will also manage their overheads better as they can control them through management of the costs of each activity that happens within the organization. Other benefits that the organization will enjoy are that it will affect the behavioral characteristics of the employees by motivating them to reduce the unnecessary costs that they use at the expense of the organization. Such are costs that the organization could function without, adoption of the ABC method of costing will also necessitate the need to have other management innovations like the Just in Time system that will help control the costs by producing the exact amount needed (Florin Carmen, 2013). This will specifically help the manufacturing department that will produce the product based on the demand from the retail section. Another management innovation that will work hand in hand with the Activity Based Coasting is the Total Quality Management system. This will work through ensuring that the quality of all final products from the manufacturing department is of the highest quality despite the fact that they may produce within a short demand (Kaplan Atkinson, 2015). This helps in ensuring that the quality of their final products and what they sell to the patients who visit the pharmacy are of the highest quality. On the external field, Phramaguard is in a better position to increase their competitiveness through adoption of the latest forms of costing in their organization. Despite the many benefits of the costing method, there are many disadvantages that will accrue to the organization. For instance, the operations of the organization will slow down affecting the production unit more so in the manufacturing department and the administration. The management will also feel the effect immediately as they will not manage to take instant reviews of their activities as they will have to adopt the slow process (Everaert Bruggeman, 2007). It will be difficult to transform to the latest form of ABC costing that requires an automated system unlike the previous one that required a slow process. The new automated system acts as an application installed in all the machines of the pharmacy that will need some form of training to the employees as they learn how to use the new system. It will help track down the authorization of all activities in the organization hence control the behavior of the employees. In conclusion, the emphasis of the costing method to the organization may have little effect in the tracking down of each cost which may prove tedious to the management as they have to keep following on individual costs of each product in the manufacturing operations to the retail section. Breaking down of the activities that will enable accounting for each type of medication produced would take lots of time making the management lose on important resources. The only benefit of the costing method is overrated as it narrows down to the justification of the budgeting activities and the service management from the strategies adopted from the use. 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