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Table of ContentsExecutive Summary. Executive Summary. 1.0...................................................................................................................................... 2.0 Chain Analysis of CSL Research and Development............................................................

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Table of Contents Executive Summary .2 1.0.Introduction……………………………………………………………………………………………………………………..3 2.0.Value Chain Analysis of CSL

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2.1.

Research and Development………………………………………………………………………………..5

2.2.

Design…………………………………………………………………………………………………………………5

2.3.

Logistics………………………………………………………………………………………………………………5

2.4.

Operations………………………………………………………………………………………………………….6

2.5.

Distribution…………………………………………………………………………………………………………7

2.6.

Marketing……………………………………………………………………………………………………………8

2.7.

Customer Service…………………………………………………………………………………………………8

3.0. Activity Based Costing (ABC) System

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3.1.

Differences between ABC and Traditional Costing System…………………………………9

3.2.

Benefits and Disadvantages of ABC for CSL Limited……………………………………………11

3.3.

Product Costing for Vaccine………………………………………………………………………………12 3.3.1. Rationale for Direct Costs………………………………………………………………………12 3.3.2. Rationale for Indirect Costs……………………………………………………………………12 3.3.3. Identification of Activity Cost Pools by Hierarchy…………………………………..13

4.0.Product Costing………………………………………………………………………………………………………………14 4.1. Direct Materials cost…………………………………………………………………………………………14 4.2. Direct Labor cost……………………………………………………………………………………………….14 4.3. Overhead Cost pools…………………………………………………………………………………………15 4.4. Calculation of Overhead Cost using ABC model…………………………………………………15 4.5. Activity Driver and Rationale and Overhead Activity Rates…………….………………….16 4.6. Allocation of Overhead costs to the product……………………………………………………..17 4.7. Total Product Costs……………………………………………………………………………………………18 5.0.Conclusion………………………………………………………………………………………………………………………18 6.0.Reference List…………………………………………………………………………………………………………………19 7.0.Appendix 23

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Executive Summary: This report includes how CSL tailors cost techniques and promotes the development of research skills and critical evaluation. The objective of this report is to provide information of the origination of CSL Limited and analysis of the value chain of CSL vaccine manufacturing. The value chain describes the six components which are research and development, design, logistics, operations, distribution, marketing and customer service in the context on CSL vaccine manufacturing and mainly emphasizes on the manufacturing procedure of vaccines briefly. Furthermore, the application of Activity-Based Costing is demonstrated on CSL Limited which includes the definition of ABC, advantages and disadvantages of ABC that CSL might encounter, differentiating ABC and traditional costing method. The direct and indirect costs, activity cost pools, cost drivers and cost hierarchy are identified for CSL vaccine manufacturing and described. Moreover, the product costs for two vaccine products of CSL are estimated along with evidence with the help of various online resources and company website. The sources used for research include scholarly journals, academic textbook, CSL Limited company website and annual report and relevant online sources. As per the results, Activity Based Costing proved to be a better approach for CSL Limited rather than traditional costing. The direct materials and direct labor can directly be traced to the product. However, the overhead costs are allocated to each activity based on the usage of the cost drivers. Thus, it is recommended for CSL Limited to use Activity based Costing to measure the production cost of vaccines more accurately.

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1.0. Introduction CSL acts as a specialty biotechnology company that manufactures and develops innovative medicines and contributes to saving lives by treating and preventing serious human medical conditions from researching, developing to manufacturing and marketing (CSL Limited, 2019). Their areas of expertise involve severe and rare diseases and vaccines. The objective of CSL is providing health services incuding blood products, antivenoms and vaccines. The other products manufactured and developed by CSL are breakthrough medicines, specialty products, haemophilia, immunoglobulin, and transplant (CSL Limited, 2019). The focus of CSL is research and development, high quality manufacturing, and patient - centered management to develop and deliver innovative biotherapies, influenza vaccines and support programs (CSL limited, 2019). CSL has several product ranges which fall in each company division. Seqirus (bioCSL) develops on vaccines, antivenoms, pharmaceuticals, whereas CSL Behring focuses on immunology, coagulation, pulmonary and critical care (CSL 2018).

2.0 Value Chain Analysis of CSL:

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The value chain acts as a substantial instrument for a company to recognize its prime activities for generating better performances and values (Gertner 2013). The elements of value chain include research and development, design, logistics, operations, distribution, marketing, and customer service. The value chain is based on the concept of a process view of organizations as well as the ability to see organizations as systems that are made up of subsystems, each including transformation processes, inputs, and outputs, which then involve acquiring and consuming resources (University of Cambridge, 2016). The values of CSL on which decisions are made and implemented include patient focus, superior performance, innovation, collaboration, and integrity (CSL Limited 2019). The value chain of vaccine manufacturing in CSL is demonstrated in figure 1:

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Figure 1: Value Chain Analysis of Vaccine (CSL Limited)

2.1. Research and Development Research and Development is one of the most critical stages of the value chain. CSL has been maintaining significant research and development operations (Perreault & Naylor 2019). CSL has various R&D programs in order to further optimize and develop its cell-based technologies in such by collaborating with Seqirus which is in the lead in contributing to the anticipation and cure of influenza globally. CSL explores several approaches in vaccines such as projects and new devices which support the innovation of new products and technologies to advance products and manufacturing process (CSL Limited 2018, p. 5).

2.2. Design CSL Limited continues to fulfill their resolution to design their products by investing in the development of their existing products for short term benefits and use strategic investments for long term benefits and product development (CSL Limited 2018, p. 17).

2.3. Logistics CSL Limited is minimizing delays by keeping an account of the activities of the supply chain. This practice improved CSL’s inventory management over time. CSL has recognized that strong supplier relationships and management performance have a significant advantage at the logistics stage. Inbound logistics allow CSL to track and trace the product from raw materials to finished goods directly and effectively. CSL uses outbound logistics by passing their products through different intermediaries to the final customer (CSL Limited Value Chain Analysis 2018).

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BioCSL, which manufactures influenza vaccine, uses cold chain logistics to provide services to bioCSL business (Press Release: ALK and bioCSL enter into a partnership for allergy 2015).

2.4. Operations CSL Limited is expanding its portfolio value by developing and launching new products in the market (CSL Limited 2019). BioCSL has collaborated with Seqirus to deliver on influenza strategy and produce and market influenza vaccine all over the world (Perreault & Naylor 2019) and influenza sales increased by 53% with an influenza vaccine (CSL Limited 2019). The product category chosen by the group are vaccines. The manufacturing process of influenza vaccine is depicted in figure 1.

2.4.1. Optimisation of Virus Growth Conditions: The vaccine manufacturer receives the hybrid vaccine virus from WHO laboratories. In order to find the best conditions in eggs, different growth conditions are tested (WHO 2009).

2.4.2. Vaccine Bulk Manufacture -

The manufacturing process of vaccines starts with Bulk Production stage which includes cell

or bacteria culture, harvesting and purification activities. A cell or bacteria culture is the process to grow a small amount of the original virus into a million doses. After growth, the virus or cells need to be harvested to release as much as cell or virus as possible by extracting the virus or cells from the growth medium. At the purification step, the virus or cells will be purified through physical and chemical processes. This allows the products to be produced at high quality.

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- Materials and chemicals will be added to the harvest virus and cells becoming a vaccine. A disrupted virus is transformed into subunit vaccine and split vaccine. An inactivated virus is next split through solvent solubilization of the lipid membrane or detergent (Kelly et al, 2011). The subunit vaccine, split vaccine, and a whole virus are polished and formulated into vaccines consecutively (Supply Chain Resilience-BioCSL, 2016). These vaccines are then formulated to lengthen storage life and to allow the use of multidose safely and effectively. -

Vaccines are then freeze-dried to keep the vaccines further preserved by removing the water

from the vaccine to become aseptic which is known as filling. This is a significant process as it ensures the quality to be stable for storage life and for better protection.

2.4.3. Quality Control: Quality control is conducted in batches after the reagents used to test the vaccines are supplied and verification of the sterility of bulk antigen is done (WHO 2009).

2.4.4. Vaccine Filling and Release: -

The finishing stage is where vaccines are put into final dosage form and including vial

labeling for each dose before any secondary packaging -

The finished vaccines are packed in batches in order to reduce the time of packaging as well

as its production line, will be put into cartons in preparing for shipment.

2.4.5. Clinical Studies: The influenza vaccines are tested on a few people in order to check if the performance meets expectation (WHO 2009). The influenza vaccine ‘FLUAD’ has reported a sales increase of 142%, and FLUCELVAX QUADRIVALENT is being produced by a massive margin in the US Market (CSL Limited 2019). These two products under the product category ‘vaccine’ have been emphasized in this value chain.

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2.5 Distribution CSL’s regular production of influenza vaccine proved their consistent readiness for epidemics (CSL Limited 2018, p. 28). CSL also expanded its operations to the markets in Northern Hemisphere and increased their seasonal production of vaccines in order to expand their support to the government (CSL Limited 2018, p. 28). CSL proved to be one of the first companies to develop and distribution epidemic vaccines to markets worldwide (CSL Limited 2018, p. 28).

2.6 Marketing As a part of their marketing strategy, CSL collects information about health professionals and customers and use that information to provide the information to the customers about CSL’s products by adjusting their marketing services in order to suit the customers. They also generate a customer list for market research (CSL Marketing Statement 2019).

2.7 Customer service CSL supports and partners with patient organizations in order to fulfill their commitment to saving lives and improving health and provides financial support to help these patient organizations (CSL Patient Support Groups 2019). By conducting the value chain analysis of vaccines in specific through CSL Limited’s planning and preparing process, it is recommended that the company consider economic sources as well as indicate the costs that have incurred and its flows. This is essential at the operation stage from raw materials to the end products.

3.0. Activity Based Costing (ABC) system Activity based costing is defined as the methodology used to measure the cost of cost objects and the performance of different activities (Langfield et al 2018). It is as an approach to the monitoring and costing of activities which includes tracing the consumption of resources and

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costing final products. The resources are assigned to the activities and then to the cost objects based on the usage (Edwards 2008). ABC measures the costs of manufacturing overhead activities and uses multiple cost drivers on different activities and allocates the costs based on the product's use of the drivers. Activities can be categorized as value-added and non-value activities (Akyol et al 2007). Activity based costing is more emphasized as costing system due to the increasing manufacturing overhead costs, less correlation of manufacturing overhead with machine hours or direct labor hours and increase of diversity in products (Averkamp 2004).

3.1. Differences between ABC and Traditional Costing System: ABC gives a more transparent picture to managers of how products, customers, distribution channels or facilities consume resources and generate revenue and helps managers to concentrate on improving activities that can influence the bottom line (Cooper & Kaplan 1992). Activity-based costing takes resources, such as machine set-up, material handling and production scheduling which are not related to production volume into account whereas, traditional costing system estimates overhead costs using a predetermined overhead rate and allocates the costs in proportion to the units of production which results in distortion of product costs of the non-volume activities (Govender 2011). On the contrary, under traditional product costing system, many product costs have been distorted and the product prices may not be competitive (Langfield et al 2018). Accurate and timely cost information is vital for operational and strategic decision making in all service and manufacturing companies. Conventional or traditional approach of costing has been criticized due to untimely, unreliable and inaccurate costing information for decision making as a result of incorrect measure for assigning overhead costs. Hence, ABC was developed (Narsaiah & Chary 2016). In order to maximize profits, companies need to correct their product prices which leads the management to use ABC (Reyhanoglu 2004).

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Cost Pools

Cost Drivers

Relation between costs and volume

Traditional costing Cost centers are used as cost pools and the overhead costs are allocated to the cost objects through the cost centers.

ABC Activities are used as cost pools. Overhead costs are accumulated in different activity cost pools and allocated to the products as per their usage of the activity drivers (Wang n.d.)

Traditional costing assumes that the overhead costs are driven by production volume (Wang n.d.). Costs are directly proportional to the production volume

Activity costing uses both volume and non-volume-based activity drivers (Nachtmann & Needy 2001). Cost consumption and production volume are not directly related (Hughes 2005) ABC has more accuracy in estimating costs by the usage of multiple cost drivers in order to trace the costs of the activities to the products (Babad & Balachandran 1993). Traditional costing is inexpensive.

Accuracy

Accuracy of information can be irrelevant, late and misleading in case of traditional costing system (Hughes 2005)

Cost effectiveness

Additional effort and costs are required to obtain the information for ABC analysis (Akyol et al 2007)

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3.2. Benefits and disadvantages for CSL Limited Advantages for CSL Limited CSL Limited can gain a multitude of benefits as a result of using activity-based costing. The main advantage for CSL Limited for using ABC is more accurate measurement costs of costs of manufacturing overhead resources (Langfield et al 2018) and improved product mix and pricing decision which lead to efficient factory management. CSL can also identify the relative profitability of products and have a better understanding of the cost drivers which can facilitate making decisions on the capital budgeting process. Furthermore, CSL Limited can evaluate on investment in new innovations and technologies. CSL can develop an activity-based flexible budget which is more precise than the conventional budgets because overhead costs behavior is identified by multiple cost drivers. ABC can also help CSL Limited to compete prices in the market as it facilitates to achieve a target cost (Reyhanoglu 2004).

Disadvantages for CSL Limited Nonetheless, CSL can also be exposed to a few demerits because of using ABC. One of the obstacles CSL Limited is expected to face is the requirement of a building management's thinking which makes it more difficult to implement. Moreover, it may be more difficult for CSL to educate their employees about the implementation of ABC (Reyhanoglu 2004) as ABC is more complex and detailed compared to traditional costing system. Maintenance of accuracy of the data for activity-based costing system requires more costs and effort (Langfield et al 2018). Furthermore, using activity-based costing is expensive and there is often a time gap between the reporting of the information and the time period mentioned in the report (Reyhanoglu 2004).

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3.3. Product Costing for Vaccine 3.3.1. Rationale for Direct costs Direct costs include direct materials and direct labor which are defined as costs that can be directly traced to the product (Arieh & Qian 2003). Direct costs of vaccine production include raw materials, components, labor, analytics and documentation of the process (Plotkin et al 2017). The direct materials for vaccine are: Vaccine Bulk Manufacture: Biological and chemical agents. Vaccine filling and release: Vials, seals and stoppers, labels (Bills & Melinda Gates Foundation). In case of Direct labor, the employees contributing to vaccine manufacturing are manufacturing associate, production technician and production operator and their average hourly rate in Australia are $23, $23 and $29 respectively (Payscale 2019).

3.3.2. Rationale for Indirect costs Indirect costs are the costs that affect the entire company and it includes depreciation, advertising, utilities and so on. Indirect costs are addressed as overhead which are not directly associated with the production (Peavler 2019). Indirect overhead costs include indirect labor cost such as plant management salaries (Bill & Melinda Gates Foundation), indirect materials such as cleaning supplies, disposable safety materials and stationery, maintenance, depreciation and electricity.

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3.3.3. Identification of Activity Cost Pools by Hierarchy Cost Hierarchy

Rationale

Activity Optimisation of virus growth conditions

Vaccine bulk manufacture

Product Level

Batch Level

Quality control

Batch Level

Vaccine filling and release

Batch Level

Clinical studies

Facility Level

Since the hybrid vaccine virus supports the production of each type of vaccine manufactured by testing growth conditions (WHO 2009), the cost hierarchy is product level. Antigens are manufactured in the bulk manufacturing process in batches (WHO 2009) due to which the cost hierarchy used is batch level. Quality control is conducted on each batch of antigens using the reagents for vaccine testing (WHO 2009). Batches of antigens are stored into vials and then tested (WHO 2009). Clinical Studies is categorized as facility level as it facilitates the manufacturing process by evaluating the performance of the produced vacc...