Dickeson--Job Costing - A Virtual Reality CheckSeptember 1998
Well . . .that's probably an overstatement. We do derive some decision comfort from job costing. It cannot set our prices, but it can support a decision to refrain from taking a job at what we perceive to be a probable loss. It can provide job comparatives for marketing analysis of completed work. It is helpful in identifying core competencies and directing marketing effort.
But those costs cause side effects that can be dangerous to your economic health. Keep them out of the hands of production personnel. Be aware, always, that job costs are part of a virtual reality.
I'm aware I'm causing discomfort when I say these things. But we know from Economics 101 that price is value perceived by the customer, constrained by competition. Your price is NOT a function of your cost.
Do the Math
We know how our virtual job costs are derived: Multiply standard cost by either production standards or actual performance. Standard costs start from an annual budget that is founded on critical assumptions that rarely prevail.
One of the prime assumptions is work center capacity and capacity utilization. That's always a SWAG (scientific wild-ass guess). Another is use of historic capital costs, depreciated or amortized. A third is that the historic cost of plant land is equal to the value of the highest and best use; pure fiction. Another is the projection of inventory turns and cost. And on and on.
Then, for an estimate, multiply those virtual standard cost guesses by "expected" production hours. Actual production hours are always subject to chaos theory, where minor fluctuations in variables have major effect on output. Rarely, if ever, is estimated usage of time and materials equivalent to the production standard estimate.
Taken with caution and fully informed knowledge of their virtual nature, job costs have usefulness—albeit limited usefulness. They are no more real than your flight simulator computer game.
When I hear someone or some trade association report that the cost of a makeready, or running waste, is included in the estimate that the customer pays for, I first get angry. Then I shed a small tear of frustration for "the mendacity of it all," as the character "Big Daddy" is fond of remarking in the play "Cat on a Hot Tin Roof."
You do not know your true job costs. You never will. Your job costs are a comfort index for some decisions. The customer pays the price you agree upon. Your customer never pays the fictitious job costs.
—Roger V. Dickeson
About the Author
Roger Dickeson is a printing productivity consultant based in The Woodlands, TX. He can be reached via fax at (281) 362-7572 or via email at email@example.com.