Enter the World of Activity-based Costing--Dickeson

Ordinarily I receive an e-mail response or two to my scribblings here, sometimes none at all. But my column in January must have touched a nerve. It was headlined by the editor, "Goodbye Job Cost Accountancy."

Half a dozen readers posted e-mails, one from as far away as South Africa. Printing Impressions is demonstrably an international journal. I've had postings from Birmingham, UK, and Beirut, Lebanon, just in the past weeks.

The monthly database I keep for web printers has included firms in Austria, Canada, Australia and Sweden. Yes, it is a small world growing smaller by the hour with the reach of the Internet.

I subscribe to an e-letter called JOHO (Journal of Hyperlinked Organization) by David Weinberger, (http://www.hyperorg.com/current/current.html) because it's outrageous, stimulating and provides URLs to undreamed of sources.

Weinberger is writing a new philosophical book and has begun by posting drafts of sections to a Website, inviting critique as he posts. This really intrigued me. I decided to copycat.

I began by posting a draft of the first pages of a book I'm writing to the Web in late February, intending to add pages and revisions from time to time. I fully expect and invite e-mail reactions and interactions leading to improvements in the manuscript and exhibits.

I sent URL notices to the respondents to my January article on Job Cost Accountancy. Readers of this column are invited to join in the hoe-down at http://www.prem-associates.com/WOWDraft.pdf. Activity-based accounting for printing as an adjunct of Enterprise Resource Management is the basic theme, but also utilizing Pragmatic Cost Accounting for marketing analysis.

How to Get Started
One of the first responses raised this question: With all of the present overcapacity hanging over the present print market, how can we expect to implement Activity-based Costing? What's your answer?

Here's my suggestion. We can't begin to address the problem of industry overcapacity. All we can do is examine the capacity utilization in our own enterprise.

Activity-based Costing (ABC) is designed to provide the cost of "not doing," as well as the cost of doing— not just the cost of jobs. Idle time of a binder in our plant is an activity. What is that idleness-activity costing us in profitability? Activity-based Costing provides us the information to support an action decision.

Now that our new ABC model has told you how much the idle time of that binder is costing you every day, what are you going to do about it? What's your action decision? List your alternatives. There are always alternatives.

The first is to do nothing—hope that something will turn up. But, wait a minute. That's what you've been doing for years and you're pulling down 3 percent to 4 percent on value-added sales. Okay. What are some other alternatives?

Sell the binder and outsource that kind of binding. Get going on marketing and sales. Solicit outsourcing from your competitors. The meter is running on that idle binder-taxi. That ABC Report is In Your Face telling you to take some affirmative action. Your Job Cost Accounting system buried that kind of information in job costs. Activity-based Costing smacks you on the schnoz with it.

Or take initial makereadies on your presses as another example. Because you're a commercial printer doing a variety of commercial jobs, one after another, you're wasting expensive crew and machine costs doing changeovers—changing side-guides, washing fountains, resetting calipers, grippers, etc.

Changeovers are activities consuming your labor, capital and time resources. ABC tells you the cost of the changeovers that you've been hiding in job jackets. The dollars you're wasting on static makereadies are eating your lunch.

What are you going to do about it? The ball's in your court. What are your alternatives? Make a list. Do something. Don't just sit there, ABC is telling you.

Accounting for Waste
Or, consider raw material. If you're not delivering it to the customer as finished product, it is waste. No question. The ABC system demands that you account for wasted, as well as delivered, raw material resources. Every identifiable activity that consumes the paper resource must be reported and valued in currency. What do you do about all those materials waste bucks that have stopped right in your chair?

Low turnovers of inventories and delayed collection of accounts are misuse of capital resource—wasted opportunity. How shall we pin a dollar value on those donkeys? They're stealing our hay.

Here's my current idea—RONA—Rate of Return on Net Assets. Divide EBITDA (Earnings Before Income Taxes, Depreciation and Amortization) by Net Assets (Assets less Valuation Reserves.) This is our present rate of return on our asset resource.

Suppose you cut your average inventory in half. Multiply the reduction by that rate of return. Got a better suggestion? Let me hear it. What happens to that rate of return if your EBITDA is zero or minimal? That means that the fat lady's singing your song, doesn't it?

Activity-based Costing for printing is a productivity view of the enterprise. The idea is to support decisions that produce a better bottom line-result so that you can buy the products supported by advertisers in these pages. Kapishe?

We must do something. We're a marginal industry now, aren't we? What are the action alternatives?

Is Activity-based Costing as I've outlined it out in left field? Admittedly it's a pioneering concept for printing. I'm neither aware of anyone using it nor of any printing software supplier offering it.

If this be treason, then make the most of it.

—Roger V. Dickeson

About the Author
Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at roger@prem-associates.com, by fax (520)903-2295, or on the Web at http://www.prem-associates.com.