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Learn Your Accounting ABCs --Dickeson

December 2002
CAUTION: Some very bright consulting guys are touting Activity-Based Costing (ABC) for printing. Ten or 15 years earlier one of the top accounting firms was urging ABC for printers. Two years or so ago, I wrote a couple of columns suggesting ABC for printers. Every so often somebody thinks it's a great idea for printing, but it goes nowhere. Let's talk about it.

The basic idea of ABC is that support departments, such as estimating, customer service, purchasing, materials management, scheduling, sales, accounting, etc., engage in activities that generate costs. They're resource consumers.  True. Those departments now operate without statistical measurement and control. Presently, we just load all those support costs into a Budgeted Hourly Rate (BHR). That rate is added to the BHR table for job chargeable hours. True. All true.

To remedy this lack of measurement, ABC would have us set up defined activities called "cost drivers" for those support activities to account separately for them. For ABC you add up the costs of the estimating department, for example, divide by the number of estimates, and you have a cost driver for estimates. Add those estimate drivers to a job or account and the cost of estimating can be deducted from sales revenue to arrive at profitability by job. Repeat this exercise for all of those other support resource activities to arrive at cost drivers by department. There are variations, of course, but this is my basic understanding of ABC.

What ABC seeks is to improve job cost accounting. It's still job "cost" accounting no matter how you slice it. A rose is a rose is a rose. It's still absorption costing where we struggle to chop expenses into bits and pieces, and distribute them equitably to jobs. Never mind that these costs still won't relate to liquidity, profit assumptions of the general ledger, nor validate by zero balancing. 

Here's a small problem: the PIA in its annual Ratio Studies proclaims that printing is "Adding Value" to raw materials, not "Adding Costs" to raw materials. Are we a "Value Added" or a "Cost Added" economic entity? We add value to raw paper and ink. That's what our customers pay for. A few customers even bring us the raw paper and ink, and ask us to add value to them. They do not ask us to add cost!

It's not a small problem at all. It's a question that goes to the heart of our business. If we don't think clearly about it, we'll measure the wrong things and make some stupid decisions. History is full of such blunders. We'll find ourselves piling up cost drivers to help price jobs we bid, but don't get. We'll increase the spurious cost feedback loop and, as a consequence, we'll have to let some trained people go in order to compensate for lost work!
 

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