Product Costing or Cost of Goods Manufactured (COGM)

 

. Major Cost Components

pharma is highly regulated, all direct and indirect costs must be properly accounted for. Here’s a structured breakdown:

a) Direct Costs

• Raw Materials (API & Excipients):

  • Active Pharmaceutical Ingredient (API) cost is usually the highest contributor.

  • Excipients, solvents, stabilisers, etc.

• Packaging Materials:

  • Primary (blister, bottle, ampule, vial).

  • Secondary (cartons, labels, inserts, shipper).

• Direct Labour:

  • Wages of production operators, technicians, line workers.

b) Indirect / Overhead Costs

• Manufacturing Overheads:

  • Utilities (water, electricity, HVAC, compressed air).

  • Machine depreciation, maintenance.

  • Validation and calibration costs.

• Quality Control (QC):

  • Lab reagents, instruments, testing, stability studies.

• Quality Assurance (QA) & Regulatory:

  • Documentation, batch record review, compliance cost.

• Warehouse & Logistics:

  • Storage, cold chain, distribution.

• Administrative Costs:

  • Salaries of QA, RA, HR, finance staff.

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2. Costing Formula

A typical formula for Cost per unit (tablet, vial, etc.):

$$\text{Cost per Unit} = \frac{\text{Direct Material + Direct Labor + Overheads}}{\text{Batch Yield (good units)}}$$

Extended form:

$$\text{Product Cost} = \text{(API + Excipients + Packaging)} + \text{(Labor)} + \text{(Overheads)} + \text{(QC/QA/Regulatory)} + \text{(Distribution)}$$

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3. Step-by-Step Example (Tablet)

• Batch size: 100,000 tablets

• API required: 12 kg @ $1,000/kg = $12,000

• Excipients: $2,500

• Packaging (foil + carton): $5,000

• Labour cost: $3,000

• Overheads (utilities, depreciation, QC): $4,000

• Total Batch Cost = $26,500

$$\text{Unit Cost} = \frac{26,500}{100,000} = \$0.265 \, \text{per tablet}$$

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4. Other Considerations

• Yield Losses: Scrap/rejected batches must be added to cost.

• Stability Studies: Mandatory for regulatory submission.

• R&D & Regulatory Filing Fees: Sometimes amortised over multiple batches/products.

• Distribution & Marketing: Often calculated separately (COGS vs. Selling Price).