NUST Business School

Managerial Accounting
Project Progress Report
Ottoman Pharma

Submitted by:
Abdullah Irshad
Bushra Nayab
Mehak Mumtaz
Nuzrat-ul-ain
Sumbal Khan
 MBA 2K18 (A)

OTTOMAN PHARMA
Company Introduction
Ottoman Pharma is a veterinary bio-medical pharmaceutical company that specializes in
producing anti-viral vaccines designed specifically for poultry for protection against various viral
diseases such as Avian Influenza, Newcastle Disease and Hydropericardium Syndrome. Ottoman
Pharma was established in 2002 as a small scale medicine manufacturer but has grown
considerably in size in terms of both customers and revenue over the years.
The company and it’s products are licensed by the Drug Regulatory Authority of Pakistan
(DRAP) and the current product line consists of 13 products with the main products being
1. OTTO FLUPLUS VAC
2. OTTO NDFLU VAC
3. OTTO H9 VAC
4. OTTO HPS VAC.

Manufacturing Process
The manufacturing process includes three sub-processes;
1. The Drug production process, where the anti-virus medication is produced

This is the main production process where the medication is produced. The main raw materials
for this process are eggs. Since a virus cannot grow without a host cell, these eggs act as
the ideal medium for growth of the different virus strains. Relevant virus strains are
introduced within the eggs and are allowed to grow for 4 to 5 days. Next, the virus strain
is extracted and inoculated to induce immunity.

The company ensures good quality eggs are chosen at this that are free from any defects and
are not already infected with any virus or other diseases. This is particularly important
as an egg that is infected could potentially destroy the whole batch of medication and
could prove to be deadly for the animals.

The other raw material is montanide oil which is imported from France on a need basis.
After the inoculation process the montanide is added to the medication. This oil increases the
impact level of the medication to ensure maximum effectiveness. Without this oil the
impact of would be 3/10 on the animal and this oil increase the impact to a 7/10 level.

2. The Testing process, which includes the testing of the product to ensure its quality and
effectiveness of impact.

The second sub process is the testing phase of the drug. This process can take up to 14 days
with the company conducting various tests to ensure quality of the drug. These tests
occur in house however samples of the products are sent to third parties regularly to
ensure un-biasness and also in compliance to rules of the regulatory authority.

3. The Packaging process, where the product is packaged into individual vials and made
ready for distribution to various clienteles.

The third sub process is the packaging process. After successful testing of the product it is
packaged into different vials. The company also produces these vials in-house to ensure
quality. The drug is secured into the vials using rubber stoppers and subsequently
sealed. Labels and bar codes are added to each individual vial in accordance with the
batch and production dates after which they are secured with shrink wraps and sent to
the finished products store.

Current Costing Methodology

No costing model used

Ottoman Pharma does not follow a costing model currently for its products. The firm
performed its previous costing operation a while back and current costs and thus prices are
adjusted after looking at different market and economic factors. The firm sets the prices
keeping in view the prices of imported medications of similar specifications and chemical
composition to their own products with no distinction between the three types of
manufacturing costs, direct materials, direct labor and manufacturing overheads.
The company groups all materials costs into one category with no distinction between direct
and indirect materials. Similarly, there is no distinction between direct and indirect labor, there
are 35 employees who work in the factory including those who are directly involved in the
manufacturing process and others like worker boys, factory cleaners and waste management
staff. All direct and indirect labor is classified under the umbrella of labor. Since direct materials
and direct labor are not classified correctly the costs of manufacturing overheads are also
distorted.

Imported product prices act as a benchmark

Prices for imported products act as a benchmark for Ottoman Pharma. According to the
company, it is the market’s view that imported medications are far superior and more effective
than locally made drugs which is why customers are willing to pay the high prices charged for
imported drugs. Thus, to compete in the market and to get additional market share the
company sells its products at a considerably lower rate than imported drugs and also offers
discounts to regular customers and to the distributors of products. However, prices are
adjusted according to seasonal demands and also prevailing inflation rates.
The main products that generate sales including OTTO FLUVAC PLUS, OTTO H9 VAC and OTTO
NDFLU VAC are sold within the price range of Rs 3,000 to Rs 3,500 depending on the amount of
discount offered. However, imported products of similar nature are available in the market for
around Rs 5,000.

Pricing on the basis of production expenditure

Additionally, the company only monitors the total expenses in the production process of its
drugs and has set an upper limit to the expenses for its products based on historical costs and
inflation. It is only after the costs exceed this limit that they identify the reason for this increase
and take into account the different factors to set higher prices to be charged from the
customers. Currently, the company only considers prices of eggs and oil which are the main raw
materials to also be the major costs for the company and focuses on these two raw materials
when setting prices for it’s products. Other costs such as candles, gloves, syringes etc are not
the point of focus in its costing.

Proposed Costing Methodology

For Ottoman Pharma, we propose a job order costing model. This is because even though the
product nature is quite similar the products are produced in batches and job order costing
would be and ideal model for costing. In this model we will need to carefully differentiate
between the different manufacturing costs of direct materials, direct labor and the
manufacturing overheads.

Direct Materials

Eggs

Direct Materials Oil

Virus Strains

The direct materials will include the eggs for propagation and incubation of the virus and also
the oil used to increase the impact, the plastic vials, rubber stopper, seals and shrink wraps
used in packaging the product.

Direct Labor

Drug Production

Direct Labor Testing

Packaging

The direct labor will include the 25 individuals involved in production, testing and packaging
process and their wages.
Manufacturing Overheads

Indirect
Gloves, Candles
Materials

MOH Factory Boys,

Indirect Labor
Cleaning Staff

Other Costs Utilities, Petrol

The manufacturing overheads will include all other costs most of which are not paid that much
attention to like indirect materials including candles, gloves, syringes etc. Apart from that all
indirect labor will be classified into overheads; these include the 10 individuals not involved in
production including, cleaning and waste management staff, worker boys, drivers etc. Other
costs include the utilities, depreciation, petrol for generators etc.

Benefits

This project has the potential to benefit both the company and us as students.

Benefits to the company

Identification of manufacturing costs
Through this project the company will be able to identify the different types of manufacturing
costs according to the three main categories of direct labor, direct materials and manufacturing
overheads. This will help them identify potential costs that can be eliminated in the production
process to increase the accuracy of the costs being charged from the customers. This could
potentially help increase the profit margins of the firm.
Actual product cost recognition and identification of
overcharging/undercharging.
As the company currently does not have a proper costing model this project will potentially
help the company identify the per unit cost of a single product. This will help the firm identify
which products cost more to produce compared to others and ultimately if the firm is charging
more (overcharging) from customers compared to local competitors thus losing sales or if the
firm is selling its product too cheaply (undercharging) thus losing potential profits that could be
earned.

Benefits to the group

This project will provide the group with exposure to the industry and how firms work practically
providing more practical learning opportunity.