Dickeson--The Age-old Problems Of Cost and Price
December 1998
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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.
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.
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