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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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February 11, 2004

The Contact Sport of Cost Accounting

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Posted by Derek

I have just enough time to post an interesting e-mail, from Nick H. in the Netherlands, responding to the links I posted the other day about research costs.

"I agree that accountants calculate costs in the way described, but accountants do a lot of accounting in ways which aren't always quite fair to all stakeholders. I have to disagree that all research costs should necessarily be paid fully by the buyer(s) of a limited number of products. The money spent during research/on research could also be seen as an investment cost. It is quite normal to defray part of investments by increasing the price of product X, it is just as normal to defray part of those costs in other ways (e.g. lower dividends, accepting lower profits or by raising the costs of all products to a lower extent). Saying this is the only (fair/possible) way to do things just isn't cutting it.

. . .the real argument which we can find buried way back in the mists of time is why a limited number of customers should pay for all costs incurred for no other reason than to increase business returns as well as increasing those returns. If your supermarket puts up a new building you'd be well miffed if they raised the price of ONLY the bread and flour to defray the building costs. Especially if the raised it to the extent needed to pay back all of the building costs within 10 years. It would be seen as unfair and wrong by pretty much everyone anywhere that this supermarket would hold just this limited (local) part of the population at ransom by suddenly raising the price of an essential condiment by a large margin in order to pay for what ultimately is mainly to the benefit of the supermarket itself. I hope you agree that there is a grain of reason in the madness of suggesting that costs should be divided more evenly over the various stakeholders."

I don't agree with all his points, but I thought I'd put them out there to stimulate debate. I'll post my response to these tomorrow. The phrases "intellectual property" and "sunk costs" will appear prominently.

(I should mention that my post-a-day schedule will probably be hitting a few potholes over the next few weeks. I'll keep the content flowing (I like doing it!), but there will be weeks when only three or four new posts appear.)

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