High drug costs are often in the news. Consumer groups contend that the pricing for some drugs (e.g., HIV anti-retrovirals, Betaseron for multiple sclerosis) is "too high" considering that the cost to manufacture each dose is so low. They talk of price gouging and excessive profits. Pharmaceutical companies defend the prices charged on the basis of research and development costs. They state that the percentage of successful drugs emanating from research efforts is low and that it may take years before a promising drug passes through Food and Drug Administration (FDA) requirements and becomes available for sale.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
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Chapter1: Financial Statements And Business Decisions
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1.4 ETHICS CASE: MANAGING COSTS
Adapted from Textbook Case 2-32
High drug costs are often in the news. Consumer groups contend that the pricing for some drugs
(e.g., HIV anti-retrovirals, Betaseron for multiple sclerosis) is "too high" considering that the
cost to manufacture each dose is so low. They talk of price gouging and excessive profits.
Pharmaceutical companies defend the prices charged on the basis of research and development
costs. They state that the percentage of successful drugs emanating from research efforts is low
and that it may take years before a promising drug passes through Food and Drug
Administration (FDA) requirements and becomes available for sale.
Exhibit 2.7
Understanding Different Cost Definitions
VALUE CHAIN COMPONENT
COST EXAMPLES
MANAGERIAL OBJECTIVE
External Financial Reporting
• Inventory, cost of goods sold, and gross margin
• Operating expenses (aggregated costs)
Internal Strategic Analyses
• New product development
• Pricing decisions
• Product mix decisions
• Customer profitability decisions
Special-order tactical decisions
Period
RESEARCH
AND DESIGN
Upstream Costs
Study emerging health
trends
• Scout movie filming
locations
X
X
Period
• Brainstorm self-driving car Write television show
capabilities
script
DEVELOPMENT
Understanding Different Cost Definitions
Engineer aircraft to
designed specifications.
• Create prototype of new
product design
X
X
X
X
X
Product
PRODUCTION
Determine cost to
produce products
• Assess prime costs: Direct
materials and direct labor
• Assess conversion costs:
Direct labor and overhead
Downstream Costs
Period
MARKETING
AND DISTRIBUTION
Lease warehouse for
finished products
• Ship sold items to
customers
Show the privacy report for this site
• Demonstrate lawn and
gardening services
X
Period
CUSTOMER
SERVICE
Investigate customer
quality complaints
Perform warranty
inspections and repairs.
Replace faulty fiber optic
cables
X
Required:
1. Which cost definition from Exhibit 2.7 is being used by the consumer groups? The
pharmaceutical companies? What items are included in the cost figures cited by consumer
groups? What items are the pharmaceutical companies including in their discussion of product
cost? Which costs do you think should be included when comparing the cost of a drug with its
price?
2. Suppose that you are the accountant for the pharmaceutical company who is charged with the
responsibility for compiling costs associated with your newest drug. The cost figures will be used
in pricing and to determine profitability of the drug. What costs do you think you would
include? Explain why you would include or not include costs.
3. Explain how the IMA Statement of Ethical Professional Practice can have a bearing on your
choice? Discuss.
Transcribed Image Text:1.4 ETHICS CASE: MANAGING COSTS Adapted from Textbook Case 2-32 High drug costs are often in the news. Consumer groups contend that the pricing for some drugs (e.g., HIV anti-retrovirals, Betaseron for multiple sclerosis) is "too high" considering that the cost to manufacture each dose is so low. They talk of price gouging and excessive profits. Pharmaceutical companies defend the prices charged on the basis of research and development costs. They state that the percentage of successful drugs emanating from research efforts is low and that it may take years before a promising drug passes through Food and Drug Administration (FDA) requirements and becomes available for sale. Exhibit 2.7 Understanding Different Cost Definitions VALUE CHAIN COMPONENT COST EXAMPLES MANAGERIAL OBJECTIVE External Financial Reporting • Inventory, cost of goods sold, and gross margin • Operating expenses (aggregated costs) Internal Strategic Analyses • New product development • Pricing decisions • Product mix decisions • Customer profitability decisions Special-order tactical decisions Period RESEARCH AND DESIGN Upstream Costs Study emerging health trends • Scout movie filming locations X X Period • Brainstorm self-driving car Write television show capabilities script DEVELOPMENT Understanding Different Cost Definitions Engineer aircraft to designed specifications. • Create prototype of new product design X X X X X Product PRODUCTION Determine cost to produce products • Assess prime costs: Direct materials and direct labor • Assess conversion costs: Direct labor and overhead Downstream Costs Period MARKETING AND DISTRIBUTION Lease warehouse for finished products • Ship sold items to customers Show the privacy report for this site • Demonstrate lawn and gardening services X Period CUSTOMER SERVICE Investigate customer quality complaints Perform warranty inspections and repairs. Replace faulty fiber optic cables X Required: 1. Which cost definition from Exhibit 2.7 is being used by the consumer groups? The pharmaceutical companies? What items are included in the cost figures cited by consumer groups? What items are the pharmaceutical companies including in their discussion of product cost? Which costs do you think should be included when comparing the cost of a drug with its price? 2. Suppose that you are the accountant for the pharmaceutical company who is charged with the responsibility for compiling costs associated with your newest drug. The cost figures will be used in pricing and to determine profitability of the drug. What costs do you think you would include? Explain why you would include or not include costs. 3. Explain how the IMA Statement of Ethical Professional Practice can have a bearing on your choice? Discuss.
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