Anagene Inc.

Anagene is a bio applied science firm started by Mark Hansen and Harold Bergman in 1993. Hansen and Bergman think to combine microelectronics and molecular biology to develop wares that would have broad commercialised applications in genomics and other fields. Anagenes mission was to facilitate breakthrough transmitted analysis. The confederation went public in the year 1998 and raised $42. 9 million. The attach tos core product was a magazine which had to be canvass with a Anagene-designed workstation. Management anticipated a long string of cartridge sales following the sale of each Anagene workstation. Product InformationWORKSTATION Anagenes first major product was a proprietary platform technology The Anagene Molecular Biology Workstation. This include a loader (which could load quatern cartridges at a metre), a reader (which read and analyzed unmatchable cartridge at a time) and a disposable cartridge that contained the conjunctions proprietary microchip. The produ ct was priced at $160,000 each workstation shipped with four cartridges. CARTRIDGES Anagene overly 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 undivided sample. As the company sold more workstations, it pass judgment the demand for its cartridges to subjoin rapidly. MANUFACTURING Anagenes focussing decided to outsource the production of workstations to Hitachi. Hitachi and Anagene would work together to cut approachs through value engineering thereby alter the transfer price to continually decrease. Initially, the final testing would be performed at Anagenes facilities. As the company grew, this activity would also be outsourced to Hitachi.Anagene construct its own manufacturing facility for the cartridges in order to capture the profits from the very high forecasted sales of its product. STANDARD COSTING SYSTE M AT ANAGENE DURING 2000 Anagenes woo system calculated standard costs once a year. The process started by estimating the budgeted variable costs per unit materials, purport labor, alfresco processing (several(prenominal) manufacturing go had been outsourced), and scrap. Plant level command operating expense costs were allocated among cartridge manufacturing, instrument manufacturing, and R&D.These assignments were determined by the manufacturing department. The cost device driver that was used to obtain overhead cost per unit was budgeted production mass. 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 direct 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 inform purposes, assessing product costs and profitability. ISSUES Because of the infancy of the company and the genomics market, it was tall(prenominal) for Anagenes attention to correctly forecast the companys future sales volumes and thereby their flagrant 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 collectible to reduction in budgeted volume. In the early quarters, sales argon 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 found on capacity. With large amounts of unwarranted capacity, the deci sion of how to apply capacity costs is critical to the companys management and its report strategy with analysts.DIFFERENT TYPES OF CAPACITIES Essentially, there are four different kinds of capacity. theoretic contentedness -This is the volume of activity that could be attained under noble-minded 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 grateful 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 fitting 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 fall trends in demand. Master-Budget Capacity - It is similar to normal capacity, except it is a shor t-run level based on demand, it minimizes under- or over applied overhead but does not provide a consistent basis for appointment 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 finis 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 send to a higher overhead cost per unit.This is a simple arithmetic response to a decrease in the denominator with an unchanged numerator. Using this new high cost driver rate to work costs will lead to lower gross margins. This may lead the company to set higher prices. These high prices may cause produc t demand to lower leading to lower activity rates which are again fed into the system causing the cost driver to go up. This creates a vicious cycle. The cost driver rate should reflect the primal efficiency of the process which is measured better by recognizing the capacity of resources organism 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.