Identify various responsibility centers- cost centers and profit centers in a pharmaceutical company and comment how they affect the management decision making.

Presented by:

Shashank Kapoor

Sachin Chopra

Gurdeep

Jasbir Singh

Shubham

Ranbaxy Laboratories Limited

Introduction

Business OverviewAs of today, Ranbaxy, India's 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 organizational unit for which a manager is made responsible.Goals for the center should be specific and measurable, andShould promote the long term interests of the organization and should be compatible with other responsibility center activities.

Types of Responsibility Centers

Cost centre

Revenue centre

Profit centre

Investmen-t centre

Question is : What is Cost centre & Profit

centre and how they affect the management decision 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

Production cost centre

Operation cost

centre

Research &

development cost centre

Contract ManufacturingTo 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.

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 Ranbaxy's 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

Development and Production

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.

Sales & marketingMarketing strategyLicensing

Parts of Profit centre

Marketing StrategiesIn 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.

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 center Cost centres are the

smallest segment of activity or area of responsibility for which costs are accumulated or ascertained.

Cost centres are created for accounting convenience

A cost centres does not have target cost , but efforts are made to minimize cost

Profit centre Profit centres are that

segment of activity which is both responsible for Revenue and expenses and disclose profit of a particular segment of activity.

Profit centres are created to delegate responsibility to individuals.

Each profit centre has a profit target.

Cost centres and profit centres

The Disadvantages of Becoming A Global Operator

The company becomes complacent and loses its innovative drive

The company loses touch with the market place and becomes de-sensitised to changes occurring within the external environment

Increased size makes communications and decision making much more complex

As the company grows the decision makers become isolated and lose touch with the customers

Decision making becomes centralised

Ranbaxy– Master Budget (Fixed)Prod.1 Prod. 2 Prod. 3 Prod. 4 Total

Units made 245,000 385,000 636,000 1,250,000

Units per batch 500 2,500 1,500 5,000

No. of batches 490 154 424 250

Cost per unit $ 5.40 $3.20 $4.25 $1.45

Cost per batch $325.00 $680.00 $400.00 $135.00

Unit-related costs(245,000x$5.40)

$1,323,000 $1,232,000 $2,703,000 $1,812,500 $7,070,500

Batch-related costs(490x$325)

159,250 104,720 169,600 33,750 467,320

Prod.-sustaining costs

125,000 168,000 256,000 355,000 904,000

Facility costs 1,450,000

Total cost center costs

$9,891,820

Ranbaxy– Actual Costs Prod.1 Prod. 2 Prod. 3 Prod. 4 Total

Units made 2,945,000 345,000 675,000 950,000

Units per batch

600 2,300 1,800 6,000

No. of batches

492 150 375 159

Cost per unit $ 5.43 $3.18 $4.33 $1.40

Cost per batch

$335.00 $670.00 $387 $144.00

Unit-related costs

$1061,850 $1,097,100 $2,922,750 $1,330,000 $6,951,700

Batch-related costs

164,820 100,500 145,125 22,896 433,341

Prod.-sustaining costs

133,000 163,000 259,000 362,000 917,000

Facility costs 1,650,000

Total cost center costs

$9,952,041

Variance analysis

Budget Actual Variance

Product 1 13,23,000 16,01,850 2,78,850

Product 2 12,32,000 10,97,100 -1,34,900

Product 3 27,03,000 29,22,750 2,19,750

Product 4 1,81,2500 13,30,000 -4,82,500

Total

70,70,500 69,51,700 1,18,800

What do we learn from the Variance analysis of RanbaxyThe 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 these control 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 difficult.

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 the responsibility centers

Expense/cost centre

Revenue centre

Profit centre

Investment centre

Output measured in monetary

terms

Input measured in monetary

terms

Output measured in monetary

terms

Output measured in monetary terms

References

www.wikipedia.org

www.ranbaxy.com

Thank You