Explaining Value Added — Dickeson

We find ourselves with two groups of cost: materials and processing of those materials. Material costs we estimate in real dollars by the job. For processing costs we make a set of guesses or assumptions and attribute them to jobs. Those guesses bear only some relationship to the real world. We’re adding costs that we know for a job to costs that we predict, and using both of them for estimates.

We’re using crew hours that we guess for scheduling. Finally, we’re using real dollars of materials actually consumed, plus crew hours actually worked, multiplied by rates we’ve configured by assumptions for comparisons.

Whew! I’m confused. For estimating, why don’t we just stick with the real dollars of materials? You know, when you look back at those ratio values, that’s really what were doing to arrive at a price, isn’t it? Otherwise why would materials be so consistent as a percentage of manufactured sales over the years?

Let’s get back to that point of deflection between materials and processing costs. We can attribute real dollars to materials by job. Once we do that, we can make pricing estimates we can depend on. We can’t do so with processing costs. (And aren’t we really doing that anyway?) Of course that might put some accountants, estimators and statisticians temporarily out of a job—until they dedicate themselves to supplying information that’s really useful to decisions that have to be made.

The fact of the matter is that we really don’t need job processing costs at all, do we? They’re misleading. They lead us to believe that real costs are going up or down when job processing costs are going up or down. They’re convoluted when it comes to price estimating. Besides, we’re not really using those estimated processing prices at all, are we? They bear little or no relationship to general ledger income statements.

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