Incremental R&D Expenses May Pressure AbbVie’s Operating Margins - Market Realist
Total costs comprised of drug costs, administration costs, direct medical and AE costs. A micro-costing analysis of resource utilization for AE treatments and disease management pre and post progressions was performed. RESULTS Applying an MBC prevalence rate, proportion of patients with active disease and treated with 3rdline chemotherapies the model estimates up to patients treated with eribulin out of eligible patients over 5 years. The main cost offsets include the displacement of more widely-used TPC therapies.
Eribulin MBC treatment in Brazil is estimated to yield an incremental progression free patient years and life years in population covered by private insurance. In such cases there is a direct relationship between cost of input and quantity of output. Other types of costs must be estimated or allocated. That is, the relationship between costs of input and units of output may not be directly observable or quantifiable. In the delivery of professional services, for example, the quality of the output is usually more significant than the quantity, and output cannot simply be measured in terms of the number of patients treated or students taught.
In such instances where qualitative factors play an important role in measuring output, there is no direct relationship between costs incurred and output achieved. Costs can have different relationships to output. Costs also are used in different business applications, such as financial accounting, cost accounting, budgeting, capital budgeting, and valuation.
Consequently, there are different ways of categorizing costs according to their relationship to output as well as according to the context in which they are used. Following this summary of the different types of costs are some examples of how costs are used in different business applications.
The two basic types of costs incurred by businesses are fixed and variable. Fixed costs do not vary with output, while variable costs do. Fixed costs are sometimes called overhead costs. They are incurred whether a firm manufactures widgets or 1, widgets. In preparing a budget, fixed costs may include rent, depreciation, and supervisors' salaries. Manufacturing overhead may include such items as property taxes and insurance. These fixed costs remain constant in spite of changes in output. Variable costs, on the other hand, fluctuate in direct proportion to changes in output.
In a production facility, labor and material costs are usually variable costs that increase as the volume of production increases. It takes more labor and material to produce more output, so the cost of labor and material varies in direct proportion to the volume of output. For many companies in the service sector, the traditional division of costs into fixed and variable does not work.
Typically, variable costs have been defined primarily as "labor and materials. It is, therefore, a fixed and not a variable cost for these companies.
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There is no hard and firm rule about what category fixed or variable is appropriate for particular costs. The cost of office paper in one company, for example, may be an overhead or fixed cost since the paper is used in the administrative offices for administrative tasks. For another company, that same office paper may well be a variable cost because the business produces printing as a service to other businesses, like Kinkos, for example.
Each business must determine based on its own uses whether an expense is a fixed or variable cost to the business.
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In addition to variable and fixed costs, some costs are considered mixed. That is, they contain elements of fixed and variable costs. In some cases the cost of supervision and inspection are considered mixed costs. Direct costs are similar to variable costs. They can be directly attributed to the production of output.
The system of valuing inventories called direct costing is also known as variable costing. Under this accounting system only those costs that vary directly with the volume of production are charged to products as they are manufactured. The value of inventory is the sum of direct material, direct labor, and all variable manufacturing costs. Indirect costs, on the other hand, are similar to fixed costs. They are not directly related to the volume of output. Indirect costs in a manufacturing plant may include supervisors' salaries, indirect labor, factory supplies used, taxes, utilities, depreciation on building and equipment, factory rent, tools expense, and patent expense.
These indirect costs are sometimes referred to as manufacturing overhead.
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Under the accounting system known as full costing or absorption costing, all of the indirect costs in manufacturing overhead as well as direct costs are included in determining the cost of inventory. They are considered part of the cost of the products being manufactured. The concepts of product and period costs are similar to direct and indirect costs. Product costs are those that the firm's accounting system associates directly with output and that are used to value inventory.
Period costs are charged as expenses to the current period. Under direct costing, period costs are not viewed as costs of the products being manufactured, so they are not associated with valuing inventories. If the firm uses a full cost accounting system, however, then all manufacturing costs—including fixed manufacturing overhead costs and variable costs—become product costs. They are considered part of the cost of manufacturing and are charged against inventory.
In budgeting it is useful to identify controllable and uncontrollable costs. This simply means that managers with budgetary responsibility should not be held accountable for costs they cannot control. Financial managers often use the concepts of out-of-pocket costs and sunk costs when evaluating the financial merits of specific proposals.
Out-of-pocket costs are those that require the use of current resources, usually cash. Sunk costs have already been incurred. In evaluating whether or not to increase production, for example, financial managers may take into account the sunk costs associated with tools and machinery as well as the out-of-pocket costs associated with adding more material and labor.
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Financial planning efforts utilize the concepts of incremental and opportunity costs. Incremental costs are those associated with switching from one level of activity or course of action to another. Incremental costs represent the difference between two alternatives. Opportunity costs represent the sacrifice that is made when the means of production are used for one task rather than another, or when capital is used for one investment rather than another.
Nothing can be produced or invested without incurring an opportunity cost. By making one investment or production decision using limited resources, one necessarily forgoes the opportunity to use those resources for a different purpose. Consequently, opportunity costs are not usually factored into investment and production decisions involving resource allocation.
ibaldupby.ga Also of use to financial planners are imputed costs. These are costs that are not actually incurred, but are associated with internal transactions. When work in process is transferred from one department to another within an organization, a method of transfer pricing may be needed for budgetary reasons. Although there is no actual purchase or sale of goods and materials, the receiving department may be charged with imputed costs for the work it has received. When a company rents itself a building that it could have rented to an outside party, the rent may be considered an imputed cost.
Costs as a business concept are useful in measuring performance and determining profitability.
What follows are brief discussions of some business applications in which costs play an important role. One of the major objectives of financial accounting is to determine the periodic income of the business. In manufacturing firms a major component of the income statement is the cost of goods sold COGS. COGS is that part of the cost of inventory that can be considered an expense of the period because the goods were sold. It appears as an expense on the firm's periodic income statement.
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COGS is calculated as beginning inventory plus net purchases minus ending inventory.