Anagene Inc.

Anagene is a biotechnology firm started by Mark Hansen and Harold Bergman in 1993. Hansen and Bergman planned to combine microelectronics and molecular biology to develop convergences that would have abundant commercial applications in genomics and other fields. Anagenes mission was to facilitate discovery genetic analysis. The comp any went public in the year 1998 and raised $42. 9 million. The telephoners core product was a powder magazine which had to be canvass with a Anagene-designed givestation. Management anticipated a long pull of cartridge holder sales following the sale of each Anagene workstation. Product learningWORKSTATION Anagenes first major product was a proprietary curriculum technology The Anagene Molecular Biology Workstation. This include a weighter (which could load quad cartridges at a meter), a reader (which read and analyzed one cartridge at a time) and a disposable cartridge that contained the companys proprietary microchip. The product was pri ced at $160,000 each workstation shipped with four cartridges. CARTRIDGES Anagene also sold disposable cartridges priced at $150 each. Each cartridge contained an electronic chip that held test sites laid out in a geometric grid called an array.Cartridges could perform up to 99 tests on any single sample. As the company sold more workstations, it anticipate the contract for its cartridges to increase rapidly. MANUFACTURING Anagenes counsel decided to outsource the fruit of workstations to Hitachi. Hitachi and Anagene would work together to cut be through value engineering thereby enabling the transfer price to continually decrease. Initially, the final testing would be performed at Anagenes facilities. As the company grew, this drill would also be outsourced to Hitachi.Anagene built its own manufacturing facility for the cartridges in order to capture the meshwork from the very high forecasted sales of its product. STANDARD COSTING SYSTEM AT ANAGENE DURING 2000 Anagenes ad dress system calculated standard tolls at one time a year. The process started by estimating the budgeted variable costs per unit materials, unionise labor, outside processing (several(prenominal) manufacturing move had been outsourced), and scrap. Plant level smash-up costs were allocated among cartridge manufacturing, instrument manufacturing, and R&D.These assignments were determined by the manufacturing department. The cost driver that was used to obtain overhead cost per unit was budgeted production stack. Machines used in the production process were assigned to different manufacturing steps which allowed for easy allocation of depreciation as an overhead expense. The standard cost per cartridge was then calculated by adding up the cipher material, direct labor and overhead costs. Some other costs associated with the sale of cartridges included the unit cost of royalties and estimated returns expense.These standard costs were used for financial account purposes, asse ssing product costs and profitability. ISSUES Because of the infancy of the company and the genomics market, it was embarrassing for Anagenes caution to correctly forecast the companys future sales volumes and thereby their taxation margins. This led to frequent revisions to previously submitted estimates. In one instance, the company revised its estimate for the FY2001 that showed standard costs increasing by 40% and gross margins dropping from 65% to 45%.One of the main reasons determine for this reduction in margins is the increase in overhead costs ascribable to reduction in budgeted volume. In the early quarters, sales are difficult to forecast and the company has experienced fluctuating production volumes and unpredictable gross margins, which has upset the board of directors. The purpose of the case study is to determine a new costing approach ground on content. With large amounts of sweet capacity, the decision of how to apply capacity costs is critical to the compa nys management and its describe strategy with analysts.DIFFERENT TYPES OF CAPACITIES Essentially, there are four different kinds of capacity. supposititious skill -This is the volume of activity that could be attained under rarefied operating conditions, with minimum allowance for inefficiency. It is the largest volume of output possible. Practical Capacity It is the highest activity level at which the factory can operate with an agreeable degree of efficiency, taking into consideration unavoidable losses of productive time (i. e. , vacations, holidays, and repairs to equipment).Normal Capacity-It is the average level of operating activity that is enough to fill the demand for the companys products or services for a span of several years, taking into consideration seasonal and cyclical demands and increasing or lessen trends in demand. Master-Budget Capacity - It is similar to normal capacity, except it is a short-run level based on demand, it minimizes under- or over appli ed overhead but does not provide a consistent basis for delegate overhead cost.Per-unit overhead will fluctuate because of short-term changes in the expected level of output. Currently, Anagene is using this method. THE GAME PLAN Strategic cost management dictates the use of practical capacity of resources rather than budgeted manufacturing volumes when calculating standard costs. If forecasted activity levels are used to calculate cost driver rates, a dying spiral may launch in an organization. That is if the cost base (the overhead expense) is fixed, then any decrease in the activity level (the cost driver) will jot to a higher overhead cost per unit.This is a simple arithmetic response to a decrease in the denominator with an unvarying numerator. Using this new high cost driver rate to figure costs will lead to lower gross margins. This may lead the company to set higher prices. These high prices may cause product demand to lower leading to lower activity rates which are aga in fed into the system causing the cost driver to go up. This creates a vicious cycle. The cost driver rate should reflect the underlie efficiency of the process which is measured better by recognizing the capacity of resources universe supplied.Anagene should use practical capacity which could be estimated by subtracting from the theoretical capacity the expected time required for normal maintenance, repairs, startups, and shutdowns. The case provides numbers on equipment depreciation, machine capacity, and manufacturing overhead to allow calculations for different overhead rates based on assumptions about how the plants capacity costs should be assigned to production quantities.