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The Doctor Is In --Dickeson

November 2004
"How's business?" The usual response is, "Great! We've got a terrific estimating system." We have a tendency to equate job costs with the costs we "estimate." Often overlooked, perhaps, is the major value of a job costing system. System suppliers know and exploit this pricing weakness.

Dr. Quincy, the '70s TV pathologist, doesn't try to predict when a person will die. He reacts to what has already occurred. We can do a Quincy act with our cost accounting system.

For a cost accounting system we have two data sets:

A. Transaction job dollar costs (Transactors)

1) Paper and ink

2) Buyouts

3) Hourly work center "standard" rates

B. Actual job performance results (Actuals)

1) Materials consumed on the job

2) Production center hours applied

We give only passing attention to multiplying Actuals by Transactors, to produce the reactionary perceivers—the Quincy's. By neglect of actual job cost experience analysis we're missing statistical guidance for the long-term success of the company.

Production standards used for pricing/estimating, as predictors, are iffy at best. Production standards attempt to apply tables to specific job specifications in order to predict what will happen. We try to apply actuarial experience tables to tell us which jobs will live and which will die. That's a waste of time and money.

No doctor or actuary can look at any person and predict life span. Why do we constantly strive to do just that in our business? Chaos theory, where small variations in inputs cause major variations in output, frustrates application of job performance predictors. Scheduling, purchasing and materials management use their own variations of production standards based on their view of experience.

Cost estimating/pricing lives in a world of virtual reality, forcing decisions based on predictions from tables that are not intended for such use. Actuaries can only look at groups like white male smokers, construction workers, homemakers, etc., and provide averages and ranges of life expectancy. All we can do with our predictors is provide averages and ranges of job performance expectancy. Clearly, we can't use them to set our pricing.

Dr. Quincy was a reactionary. He looked at what has happened, not what is to be. Let's react to job costs. Let's do a Quincy and examine the job bodies after the production "crimes" have been committed to truly learn from experience. When we multiply standard transaction costs by actual results we are doing this. We forsake virtual reality for the real world. No predictors, just actual experience, converted to some common denominator of dollars.
 

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