Musings on Material Multipliers -- Dickeson
October 2001
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Peter Doyle of Action Printing in Fond du Lac, WI, and I have concluded that printers use job costing simply for the purpose of pricing jobs. Most don't do post-production variance analysis or compare actual results with estimates. Nor do they do any variance analysis comparing actual job costs with General Ledger results. If they did, the variances would be devastating.
Maybe they did so a time or two in the past but, because we're so frustrated by the differences, they just toss a dust cover over that "elephant in the living room." So why do we persist in using job cost estimates for pricing? Tradition? Because we don't know any other way to price jobs? Or is it because we just don't realize the fragile construct of critical assumptions involved?
How's that for a shotgun generalization? Let's follow on with another.
Estimates of materials to be used on jobs are within acceptable variances when compared with actual results in most shops. Paper, ink and outside job purchases are fairly predictable.
Materials costs are NOT hourly job costs. There's no chargeable/non-chargeable nonsense involved with materials. Nor is there guessing at capacity and capacity utilization for materials a year into the future. Nor are we making dubious assumptions that allocate overhead costs to production center rates for paper and ink. We don't use assumptions about sales, depreciation or obsolescence of materials.
So why don't we use just the materials estimation part of our systems as a base for some kind of pricing perspective? Shove that job cost portion of any estimate into a place where the sun does not shine. Is that too basic and simple? To this point, the only critical assumption we make is that we can acceptably predict paper, ink and outside purchases for jobs. Check it out for yourself. Compare your average materials estimates with average materials actually consumed for three or four groups of 10 to 12 recent jobs. Okay?
Do you recall an ancient rule of thumb that said, "Your price should be three times your materials?" I do. Many old-timers (BC—Before Computers) will recollect the rule. Well, if we can do a fair job of estimating materials, why not use some variation of that ancient wisdom? Estimate your materials costs, multiply by three and see what pops up. Remember that the result is not the price. It's just a bogey, a support number, a starting point for evaluating past history, competition, market conditions, which way the wind is blowing and all those elements of a SWAG (Scientific Wild-Ass Guess).
Maybe they did so a time or two in the past but, because we're so frustrated by the differences, they just toss a dust cover over that "elephant in the living room." So why do we persist in using job cost estimates for pricing? Tradition? Because we don't know any other way to price jobs? Or is it because we just don't realize the fragile construct of critical assumptions involved?
How's that for a shotgun generalization? Let's follow on with another.
Estimates of materials to be used on jobs are within acceptable variances when compared with actual results in most shops. Paper, ink and outside job purchases are fairly predictable.
Materials costs are NOT hourly job costs. There's no chargeable/non-chargeable nonsense involved with materials. Nor is there guessing at capacity and capacity utilization for materials a year into the future. Nor are we making dubious assumptions that allocate overhead costs to production center rates for paper and ink. We don't use assumptions about sales, depreciation or obsolescence of materials.
So why don't we use just the materials estimation part of our systems as a base for some kind of pricing perspective? Shove that job cost portion of any estimate into a place where the sun does not shine. Is that too basic and simple? To this point, the only critical assumption we make is that we can acceptably predict paper, ink and outside purchases for jobs. Check it out for yourself. Compare your average materials estimates with average materials actually consumed for three or four groups of 10 to 12 recent jobs. Okay?
Do you recall an ancient rule of thumb that said, "Your price should be three times your materials?" I do. Many old-timers (BC—Before Computers) will recollect the rule. Well, if we can do a fair job of estimating materials, why not use some variation of that ancient wisdom? Estimate your materials costs, multiply by three and see what pops up. Remember that the result is not the price. It's just a bogey, a support number, a starting point for evaluating past history, competition, market conditions, which way the wind is blowing and all those elements of a SWAG (Scientific Wild-Ass Guess).
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