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Dickeson--Job Costing - A Virtual Reality Check

September 1998
Virtual reality is created by a computer using sights and sounds that the mind perceives as real as the desk, table or chair where you're reading these words. This reality exists in that computer gear you put over your eyes and ears to see and hear a simulated scene.

We also have our own virtual reality in printing management. We call it "job cost accounting." We see these job costs, and we think they're as real as the chair that we occupy as we look at them.

"An hour in platemaking costs me $57.43." We forget that these costs are a virtual reality we conjure up for ourselves in order to make hourly business decisions.

Our belief in those costs changes from simile to metaphor—we no longer say our hourly cost to make a plate is like $57.43. We say it is $57.43! And when our competitor beats us on a bid, we say, "He doesn't know his costs."

Truth is, we were bested on that bid by our own pricing, not our competitor's misunderstood costs. Prices and costs are totally different concepts in a free market economy. It costs General Motors $400 more to make a new sedan than it costs Ford, the press tells us. That may or may not be so. That's someone's view of the virtual cost realities of auto manufacturing. As consumers, we don't care what it cost either company to make a car. We buy it because…well, because it has a cooler look and is "better priced" for the values we perceive.

Virtual Confusion
When we use virtual costs as the basis for pricing, we confuse ourselves. In production, people tend to believe that if that virtual cost was included as the price that the job sold for, then the client is paying those virtual costs. Utter nonsense. Customers pay prices, not costs. When the job is actually performed more efficiently than expected, do we give the customer a credit? Reduce the price? No way! If performance is less efficient than planned, do we bill the customer the additional virtual costs? Come on!

I've spoken these obvious truths in this column several times in the past 19 years and written a little booklet on the subject. But I find it's necessary to repeat a variation of the message about every third year because the myth of virtual job-cost reality will not go away.

We refuse to let it depart because we wish it to be true. At some point in our lives, we gave up on Santa and the Tooth Fairy, but we substituted job costing in their place.

 

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