What are the most effective cost allocation methods for biotechnology companies?

1 Activity-based costing

One of the most effective cost allocation methods for biotechnology companies is activity-based costing (ABC). ABC is a method that identifies the activities that consume resources and assigns costs to them based on the amount of resources they use. Then, the costs of the activities are allocated to the products or services that benefit from them. ABC helps biotechnology companies to capture the complexity and diversity of their operations, as well as the variability and uncertainty of their costs. ABC also provides more accurate and relevant information for decision making, such as product mix, pricing, and outsourcing.

2 Joint costing

Another effective cost allocation method for biotechnology companies is joint costing. Joint costing is a method that applies to situations where two or more products or services are produced from a common input or process, and the costs cannot be separated until a split-off point. For example, a biotechnology company may produce multiple drugs from a single batch of cells or enzymes. Joint costing helps biotechnology companies to allocate the joint costs to the products or services based on some common measure, such as sales value, physical units, or market value. Joint costing also helps biotechnology companies to evaluate the profitability and efficiency of their joint processes and products.

3 Cost-plus pricing

A third effective cost allocation method for biotechnology companies is cost-plus pricing. Cost-plus pricing is a method that sets the price of a product or service by adding a markup to the total cost. The markup is usually expressed as a percentage of the cost and reflects the desired profit margin. Cost-plus pricing helps biotechnology companies to recover their costs and earn a reasonable return on their investments, especially when they face high research and development costs, regulatory uncertainties, or limited competition. Cost-plus pricing also helps biotechnology companies to simplify their pricing decisions and avoid price wars.

4 Overhead allocation rate

A fourth effective cost allocation method for biotechnology companies is overhead allocation rate. Overhead allocation rate is a method that calculates the rate at which indirect costs are allocated to products or services based on a predetermined base, such as direct labor hours, direct labor costs, or machine hours. The rate is usually computed at the beginning of a period and applied throughout the period. Overhead allocation rate helps biotechnology companies to distribute their overhead costs among their products or services in a consistent and systematic way. Overhead allocation rate also helps biotechnology companies to monitor their overhead performance and adjust their budgets.

5 Transfer pricing

A fifth effective cost allocation method for biotechnology companies is transfer pricing. Transfer pricing is a method that determines the price at which one division or subsidiary of a company sells its products or services to another division or subsidiary of the same company. Transfer pricing helps biotechnology companies to coordinate their internal transactions, optimize their tax liabilities, and motivate their managers. Transfer pricing also helps biotechnology companies to measure their divisional or subsidiary performance and allocate their resources efficiently.

6 Here’s what else to consider

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