Cardinal Health 2009 Annual Report Download - page 65

described below. The brokerage operation (“Brokerage”) only services bulk customers, therefore, expenses
associated with Brokerage are allocated to bulk customers. The remaining operations (i.e., excluding
Distribution) service non-bulk customers, therefore, expenses associated with these operations were
allocated to non-bulk customers.
The following describes the allocation of the major components of cost of products sold for Distribution
between bulk and non-bulk customers:
• Cost of products sold for pharmaceutical products is determined by specifically tracking the
manufacturer’s designated price of products, at the time the products are sold, by bulk and non-bulk
customers. The manufacturer’s designated price is then reduced by other components impacting cost of
products sold, including distribution service agreement fees, pharmaceutical price appreciation,
manufacturer cash discounts and manufacturer rebates and incentives. In addition, other inventory
charges and credits are added or subtracted, as appropriate, to arrive at cost of products sold. The
Company used the following methods that it believes provide a reasonable correlation to allocate the
remaining components of cost of products sold between bulk and non-bulk customers:
• Distribution service agreement fees and pharmaceutical price appreciation are tracked by
manufacturer. Therefore, the Company allocated the distribution service agreement fees and
pharmaceutical price appreciation associated with each manufacturer among their products in
proportion to sales of each product between bulk and non-bulk customers.
• Manufacturer cash discounts are recognized as a reduction to cost of products sold when the
related inventory is sold and were allocated in proportion to the manufacturer’s published price of
the product sold to bulk and non-bulk customers.
• Manufacturers’ rebates and incentives are based on the individual agreements entered into with
manufacturers related to specific products. Rebates and incentives were grouped by contract terms
and then allocated in proportion to sales to bulk and non-bulk customers.
• Other inventory charges and credits include charges for outdated and returned inventory items and
fluctuation in inventory reserves. The Company estimated the portion of these inventory charges
and credits attributable to each product and then allocated them to bulk and non-bulk customers in
proportion to the sales of these products.
The Company used methods that it believes provide a reasonable correlation to allocate the SG&A expenses
for Distribution between bulk and non-bulk customers as follows:
• Warehouse expense includes labor-related expenses associated with receiving, shipping and
handling the inventory as well as warehouse storage costs including insurance, taxes, supplies and
other facility costs. Warehouse expense was allocated in proportion to the number of invoice line
items filled for each bulk or non-bulk customer because the Company believes that there is a
correlation between the number of different products ordered as reflected in invoice lines and the
level of effort associated with receiving, shipping and handling that order (bulk customers
typically order substantially larger quantities of products and therefore generate substantially
fewer invoice lines which results in substantially less warehouse expense being allocated to bulk
customers);
• Delivery expense includes transportation costs associated with physically moving the product
from the warehouse to the customer’s designated location. Delivery expense was allocated in
proportion to the number of invoices generated for each bulk or non-bulk customer on the
assumption that each invoice generates a delivery;
• Sales expense includes personnel-related costs associated with sales and customer service
activities (such activities are the same for both bulk and non-bulk customers). Sales expense was
allocated in proportion to the number of invoices generated for each bulk or non-bulk customer
because customer invoices are a reasonable estimate of the amount of customer service calls and
sales effort; and
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