Learn Your Accounting ABCs --Dickeson

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!

Most troublesome about ABC for print support activities is the time required for record keeping to support those cost drivers. How does a customer service rep log time for activities, by job or by account?

The whole ABC support cost scheme depends on recording time by job, account, activity, work center and employee. If it's hand-logged, then it must be keyed into a database. As an attorney for a dozen years I know how poorly time logging works for professional or administrative personnel. You do it at the end of a day, or maybe next morning, or maybe—we had to await DMI (Direct Machine Interfacing) to get valid time entry for print production centers.

It's doubtful that such an effort to capture support activity time or instances would get off ground-zero in a busy print shop.

ABM (Activity-Based Measuring) would, however, work nicely in print production centers supported by Direct Machine Interfacing. With DMI in place, the computer logs time and events from the equipment directly to the computer. ABM would measure time of job activities that did not result in deliverable output. Call it ABM—Activity-Based "Measurement"—not Activity-Based "Cost." Keep the deliverable time and non-deliverable time by jobs in hours. Forget trying to convert time into dollars with a Budgeted Hourly Rate. We're delivering value added paper and ink over time.

Non-deliverable time (NDT) in production centers doesn't add value to raw materials. NDT constrains production throughput. NDT is a waste of capacity. It is the enemy of efficiency and effectiveness. By collecting and reporting hours spent in makereadies, stops, maintenance, holidays, weekends, waiting, re-work, we're measuring lost activity time—wasted time—NDT.

To illustrate Activity-Based Measurement, here's a rolling quarter table for a press production center. Note that there are 2,184 hours reported—the total time available in 13 weeks.

But this isn't what's intended by typical Activity-Based Costing. It isn't "cost." It's hours. It isn't support. It's production. The "drivers" are grouped as either deliverables or non-deliverables. Production activities either add value or they don't. Black or white. On or off. Simple. Evocative reporting.

This is useful, credible, zero balancing information that will support decisions directed to adding value, not just piling on the cost fictions. Half the capacity is being wasted on this press. What shall we do about it?

At this point in time I'm not certain that typical Activity-Based Costing of printing support actions is either feasible or useful. The jury's still out. On the other hand, Activity-Based Measurement of production is very helpful for improving capacity utilization—for adding economic value—to increase profits.

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached via e-mail at rogervd@bigfoot.com.