Dickeson--Job Costing - A Virtual Reality Check

Virtual reality is created by a computer using sights and sounds that the mind perceives as real as the desk, table or chair where you're reading these words. This reality exists in that computer gear you put over your eyes and ears to see and hear a simulated scene.

We also have our own virtual reality in printing management. We call it "job cost accounting." We see these job costs, and we think they're as real as the chair that we occupy as we look at them.

"An hour in platemaking costs me $57.43." We forget that these costs are a virtual reality we conjure up for ourselves in order to make hourly business decisions.

Our belief in those costs changes from simile to metaphor—we no longer say our hourly cost to make a plate is like $57.43. We say it is $57.43! And when our competitor beats us on a bid, we say, "He doesn't know his costs."

Truth is, we were bested on that bid by our own pricing, not our competitor's misunderstood costs. Prices and costs are totally different concepts in a free market economy. It costs General Motors $400 more to make a new sedan than it costs Ford, the press tells us. That may or may not be so. That's someone's view of the virtual cost realities of auto manufacturing. As consumers, we don't care what it cost either company to make a car. We buy it because…well, because it has a cooler look and is "better priced" for the values we perceive.

Virtual Confusion
When we use virtual costs as the basis for pricing, we confuse ourselves. In production, people tend to believe that if that virtual cost was included as the price that the job sold for, then the client is paying those virtual costs. Utter nonsense. Customers pay prices, not costs. When the job is actually performed more efficiently than expected, do we give the customer a credit? Reduce the price? No way! If performance is less efficient than planned, do we bill the customer the additional virtual costs? Come on!

I've spoken these obvious truths in this column several times in the past 19 years and written a little booklet on the subject. But I find it's necessary to repeat a variation of the message about every third year because the myth of virtual job-cost reality will not go away.

We refuse to let it depart because we wish it to be true. At some point in our lives, we gave up on Santa and the Tooth Fairy, but we substituted job costing in their place.

Well . . .that's probably an overstatement. We do derive some decision comfort from job costing. It cannot set our prices, but it can support a decision to refrain from taking a job at what we perceive to be a probable loss. It can provide job comparatives for marketing analysis of completed work. It is helpful in identifying core competencies and directing marketing effort.

But those costs cause side effects that can be dangerous to your economic health. Keep them out of the hands of production personnel. Be aware, always, that job costs are part of a virtual reality.

I'm aware I'm causing discomfort when I say these things. But we know from Economics 101 that price is value perceived by the customer, constrained by competition. Your price is NOT a function of your cost.

Do the Math
We know how our virtual job costs are derived: Multiply standard cost by either production standards or actual performance. Standard costs start from an annual budget that is founded on critical assumptions that rarely prevail.

One of the prime assumptions is work center capacity and capacity utilization. That's always a SWAG (scientific wild-ass guess). Another is use of historic capital costs, depreciated or amortized. A third is that the historic cost of plant land is equal to the value of the highest and best use; pure fiction. Another is the projection of inventory turns and cost. And on and on.

Then, for an estimate, multiply those virtual standard cost guesses by "expected" production hours. Actual production hours are always subject to chaos theory, where minor fluctuations in variables have major effect on output. Rarely, if ever, is estimated usage of time and materials equivalent to the production standard estimate.

Taken with caution and fully informed knowledge of their virtual nature, job costs have usefulness—albeit limited usefulness. They are no more real than your flight simulator computer game.

When I hear someone or some trade association report that the cost of a makeready, or running waste, is included in the estimate that the customer pays for, I first get angry. Then I shed a small tear of frustration for "the mendacity of it all," as the character "Big Daddy" is fond of remarking in the play "Cat on a Hot Tin Roof."

You do not know your true job costs. You never will. Your job costs are a comfort index for some decisions. The customer pays the price you agree upon. Your customer never pays the fictitious job costs.

'Nuff said.

—Roger V. Dickeson

About the Author
Roger Dickeson is a printing productivity consultant based in The Woodlands, TX. He can be reached via fax at (281) 362-7572 or via email at rogervd@bigfoot.com.