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