Financial Management: Activity Based Costing at AstraZeneca

This case study delves into AstraZeneca's implementation of Activity Based Costing (ABC) for financial management and decision-making. It explores the company's motivation for adopting ABC, the steps involved in its implementation, and the advantages and disadvantages experienced by the organization. The analysis covers how ABC aids in accurate product costing, overhead tracing, and strategic decision-making, while also acknowledging the complexities and resource requirements associated with the system. Furthermore, the case study contrasts ABC with traditional costing methods, highlighting the benefits of ABC in providing a more detailed and accurate cost assessment, ultimately improving pricing strategies and profitability analysis for AstraZeneca. This document is available on Desklib, a platform providing solved assignments and study resources for students.

FINANCIAL
MANAGEMENT &
DECISION MAKING
INDIVIDUAL
PRESENTATION

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Implementation of Activity Based Costing – A business case of AstraZeneca..........................3
Advantages & disadvantages of the business implementing ABC...........................................5
Advantages of ABC system over traditional costing techniques.................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
Books and Journals......................................................................................................................8

INTRODUCTION
Financial management is concerned with the decision making pertaining to how funds
could be acquired efficiently by identifying right source of finance, deployment of funds by
making right choice among the available investment proposals and at last deciding how much
should be distributed among shareholders as dividends and how much should be retained with
the company to make further investment (Hansen, Mowen and Heitger, 2021). In this report, the
discussion would be done pertaining to how Activity Based costing system has been
implemented within AstraZeneca which is a global biotechnology & pharmaceutical company
headquartered in Cambridge, England. It provides innovative medicines to the patients residing
across the globe. Therefore, the discussion would be based on how ABC has been implemented
by AstraZeneca, the advantages & disadvantages of this costing system to the business and
extent to which ABC system is beneficial as compared to the traditional costing techniques.
MAIN BODY
Implementation of Activity Based Costing – A business case of AstraZeneca
AstraZeneca is a science led biopharmaceutical company operating at global level whose
operations involves discovery, development as well as commercialization of medicines to be
prescribed to different type of patients worldwide. Its purpose is to transform healthcare and
changing the lives billions of people living across the globe for their betterment and addressing
healthcare challenges faced by humankind. Therefore, the company is indulged in manufacturing
& selling of biotechnology & pharmaceutical products for the treatment of several kind of
diseases & disorders associated with humankind. So, there is always a need for best costing
technique to determine the per unit cost in most effective manner in order to make out the
appropriate sales price for different categories of products. With this, the set targets for the profit
margins become easy to attain. Activity Based Costing or ABC is one of the most preferred
costing technique of the contemporary world with reference to the global manufacturing
industry.
Activity Based costing
ABC involves a method of assigning indirect costs & overhead to the products & services. This
costing system is based activities that are undertaken due to any event or unit of work for the

fulfilment of specified goal (Zheng and Abu, 2019). This costing technique give managers the
accurate figure for the production cost which is helpful for making decisions pertaining to which
product should be produced and what would be the most efficient method of production.
Accordingly, the pricing decision are possible to be taken in an effective manner. There seems
increase in preference for the activity based costing within the manufacturing unit across the
globe because of its ability in enhancing the reliability of data related to costs which helps in
determining the true cost of the product along with facilitating better classification of costs that
has been incurred during the production process.
ABC implementation within AstraZeneca
AstraZeneca produces different type of products which extends from syringe to pastille
which demands varied types of machines (Areena, 2019). The process of manufacturing become
more complex when the variations arises within the operations from one country to another. As
per the opinion of process manager of AstraZeneca, the largest component of the total cost is
made by the direct costs and thus are related to the manufacturing process. Other costs incurred
by the company include energy and marketing cost and accordingly, prices are set in alignment
with the manufacturing cost which makes the business independent of prices prevailing in the
market.
In AstraZeneca, ABC makes up the most crucial system of costing as the production of
single product requires the performance of about 9 to 10 activities. By adopting ABC model,
every product bears the expense related to it. Accordingly, ABC model is critical in decision
making regarding products in terms of outsourcing or setting price for it. This is because there
are many instances where buying product component from the outside becomes cheaper as
compared to manufacturing it for AstraZeneca and thus, the top management gets assistance in
making decisions such as whether to make or buy the product.
Apart from decision making related to product, ABC model also assists management in
making choices strategically by providing all - inclusive reports regarding the cost of
manufacturing certain types of medicines (Blocher and et.al., 2019). However, this model is not
used by the management of AstraZeneca in making decisions related to customers such as
customer segmentation. Nevertheless, this model is being used by the company’s management
for making comparison of prices between years and valuing inventory.

Moreover, management of the company has found that the ABC model has been proved
to be challenging in terms of consumption of time which must be controlled in any way. Many
time company requires to enter data manually when not finding the obtained data through ABC
model to be right. Furthermore, management find it complex to calculate the cost per product
right from obtaining raw materials till producing finished products and thus, took quite more
time in determining per product cost. Despite of these complexities, company don’t see this
model to be expensive one. Therefore, with the above discussion it has been identified that ABC
can be regarded as the economic model helping in identification of the cost pools on the basis of
number of time the activity is being performed. While implementing ABC model, the
management of AstraZeneca performs several steps such as identification of activities related to
the production of different medicines, determination of activity cost, determination of cost
drivers such as machine or labor hours, number of setups, etc., collection of activity data and
finally computation of the cost of product (Steiss, 2019).
Advantages & disadvantages of the business implementing ABC
By implementing activity based costing, AstraZeneca enjoys the following advantages:
Accurate cost of product: With ABC model, determination of product cost can be done in
reliable & accurate manner by identifying the cause & effect relationship in incurrence of cost. In
case of large & advanced manufacturing set up like AstraZeneca, overheads make up the large
portion of the total cost and thus more realistic view of the product cost can be obtained.
Tracing activities & overheads: In ABC model, multiple cost drivers are being used which are
based on transaction & not on product volume. Also, activities within & beyond the factory are
traced for creating comprehensive view of overhead costs to charge it to the product. Thus,
making it easier to attain the set profit targets.
Better decision making: By making use of more reliable data related to cost of producing
different medicines, management of AstraZeneca is able to fix selling price of medicines
correctly & accurately (Gisario, and et.al., 2019).
Facilitate evaluation of production efficiency & making improvements therein: ABC allows
manager in assigning the value to the indirect costs by considering it as direct cost and with the
breakdown of indirect cost of each activity, improvements can be made. Also, ABC is helpful for

the management in evaluating process efficiency, management influence and overall costs
associated with different departments.
Despite of the above advantages, there are several disadvantages as well because of the
implementation of ABC model, which are as follows:
Complexity & expensiveness: ABC is complex due to the presence of multiple cost pools and
cost drivers as compared to traditional costing system. Accordingly, managing with ABC system
becomes costly (Drury, 2018).
Selection of cost drivers: AstraZeneca sometime also faces difficulties while implementing
ABC system which involves selection of cost drivers, varying rates of cost drivers, assignment of
costs that are common to all the products, etc.
More resource requirement for gathering accurate cost data: AstraZeneca has hired team
members to accomplish the task of activity costing and gathering cost data which affects the
payroll and even leads to the requirement of purchasing data collection software.
Advantages of ABC system over traditional costing techniques
Activity based costing & traditional costing are the two methods in the field of
accounting which are used for the purpose of allocating overhead costs to the products. Both of
these methods are useful in estimating total overhead cost of production and assigning the same
to the products on the basis cost driver rate. However, there is difference lies in these two
methods in terms of complexity & accuracy where is considered to be more accurate as well as
complex as compared to traditional costing technique (Hansen, Mowen and Heitger, 2021). The
following are the benefits of activity based costing over traditional costing technique:
 ABC assigns overhead costs to activities and further assigns the overhead costs to
product on the basis of activities performed for their production which gives true
picture of product costs and thus helps in setting price accurately.
 ABC provides detailed measurement of costs as compared to traditional system of
costing.
 ABC helps in identifying unprofitable product that the company must eliminate
which is not possible under traditional costing technique.

CONCLUSION
From the above report it has been concluded that AstraZeneca by implementing the
activity based costing system is benefitting in several terms like getting accurate product cost
data, ability to set correct product price, etc. In this report, the case of AstraZeneca has been
chosen and identified that how the ABC model has been implemented within the organizational
and what the advantages & disadvantages that the business is facing due to this model. Further,
the benefits of ABC over traditional costing has been identified with reference to AstraZeneca.

REFERENCES
Books and Journals
Areena, S. N., 2019. A review on time-driven activity-based costing system in various
sectors. Journal of Modern Manufacturing Systems and Technology, 2, pp.15-22.
Blocher, E. J., and et.al., 2019. Cost Management (A Strategic Emphasis) 8e. McGraw-Hill
Education.
Drury, C., 2018. Cost and management accounting. Cengage Learning.
Gisario, A., and et.al., 2019. Metal additive manufacturing in the commercial aviation industry:
A review. Journal of Manufacturing Systems, 53, pp.124-149.
Hansen, D. R., Mowen, M. M. and Heitger, D. L., 2021. Cost management. Cengage Learning.
Steiss, A. W., 2019. Strategic management for public and nonprofit organizations. Routledge.
Zheng, C. W. and Abu, M. Y., 2019. Application of activity based costing for palm oil
plantation. Journal of Modern Manufacturing Systems and Technology, 2, pp.1-14.