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Dickeson--The Age-old Problems Of Cost and Price

December 1998
Judging by the e-mail response to the article I wrote about job costs as a "virtual" reality in the September issue of Printing Impressions, the relationship of cost and price is more confusing to printers than is technology! Trouble is, the bean counters, the high priests of accounting, who should know better, don't seem to have a clue. (Now watch my e-mail box fill up.)

The double-entry system started in northern Italy about 700 years ago had limitations. It was "custodial" tracking of cargo contents and share ownership for sailing ships trading with the Indies. Cargoes were debits and owner ships were credits and they had to be equal—strike a zero balance. We're still using that system. We call it "general ledger" accounting now. CPAs, lawyers, the SEC, the NYSE, the IRS, banks and others have added so many layers of sophistication, Columbus wouldn't know what belonged to Queen Isabella in the holds of the Nina, Pinta and Santa Maria today.

So now we quite legitimately keep several sets of books, trying to stay out of trouble and still make the payroll for the shop. Talk about your costs of bookkeeping!

The limitations imposed in 1300 A.D. are still with us in printing companies. It's a system of static dollar units of measure in a dynamic economy. The binder you bought in 1985 for $600,000 is depreciated in your general ledger to $20,000, and you're still using it at zero depreciation cost. If you added that binder today, it'd cost you double the $600k of 1985 and your costs would skyrocket. That makes sense?

You've spent bundles on payroll training people and they're on the books at zero? And on and on in our custodial/general ledger system of accounting—originally developed by the medieval merchants of Genoa.

Cost accounting was developed in the early 1900s for mass production. We adapted it to printing as job cost accounting even though our products are not mass productions of the same product. Cost accounting's not a double entry system since it isn't custodial. If you disbelieve that, sum up all your job costs for last year and compare it with the sum of your general ledger costs for the same categories. Surprised?

You shouldn't be. Ledger costs are custodial while job costs are predictive. Even though they're entirely different concepts, we confuse the two by importing some of the custodial values into job cost.

There are at least three varieties of job cost rates: direct, manufacturing and full absorption. A manufacturing rate imports costs from the ledger system despite all its limitations. A full absorption rate includes the manufacturing rate but then adds an arbitrary portion of all the general administrative and sales costs of the company to the rate.

Well, good buddies, them's the rules by which we play the game and we're not gonna change 'em. So we work around them.

One of the steps we can take immediately that will assist our effectiveness is abandonment of either manufacturing or full absorption job cost accounting rates in favor of direct costing rates. Direct costs are those costs that would not be incurred but for the incidence of a job: materials, buyouts and direct labor.

Forget the other general ledger costs—they're either "sunk" costs or the "costs of being in business." "If we do this job, what immediate application of our liquidity is involved? What goes out of our pocket in the next few days to do that work?" We prefer not to sell at a price below direct cost. That's a kind of rejection threshold. What should we ask as the price, knowing the level below which we don't want to go?

The difference between direct cost and selling price we call "contribution." Do we have a target contribution as a pricing benchmark? Is it the same for all print products? How could it possibly be? Is it the same for all customers? Of course not, since it depends on "perceived" value-added. Is it identical for different jobs for the same customer? Most unlikely. Do we have varying contribution strategies in our marketing plan? We certainly should.

Setting price is where we lack statistical tools. Case in point: Printer-publisher with a specialty is doing well. Now wants to sell idle time available on his press. How to price it? George Accountant says use a manufacturing or full absorption cost and mark it up. Ugh.

"Hey, George, price is an external measure of the customer's perception of value-added, limited by competition. What is the customer's value perception? How do we find that out? What would competitors charge? How do we discover that?"

Now, standing with tenuous assurance at best on that direct cost base, how high dare we reach for a price? What is the price elasticity of the customer's value perception? Upward? Downward? Where will our competitor come down on price? Will we get a 'second look?' At least we're asking the right questions, aren't we? That's half the solution. We're not simply marking up some figment of manufacturing or full absorption rate! Oh, for some magic box! Dear Peter Drucker, where are you now when we need you?

Ah yes, Drucker, we read you in Forbes, August 24, 1998, on page 46: Our accounting/cost accounting computerized systems have had "…near-zero impact on the management of business itself."

We must redefine the information we need. We need economic chain accounting, you say. We must approach our printing business as a creator of value for a customer and not as simply a creator of internal costs. Therefore in setting our contribution reach we must concentrate on factors outside the business, not on cost events inside the business.

Okay, let's "just do it", as Nike says. Let us cease and desist with all our cost accountancy as a measure of PRICE. Let's re-engineer the information that guides our basic business decisions. Starting as of NOW—if not sooner.

—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) 419-8213 or e-mail at


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