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SGIA

Specialty Graphic Imaging Association

Pricing: Accounting for Real Costs

The importance of accounting for both fixed and variable costs is common business knowledge today.

When famed bank robber Willie Sutton was asked why he robbed banks he supposedly replied “cause that’s where the money is”. Sutton’s law — used today in disciplines as varied as scientific research and cost accounting — states, the perhaps obvious, that one should first do the tests that can confirm the most likely diagnosis.

So, in estimating a job and its pricing, we should follow Sutton’s example and go where the money is, or, in cost accounting terms, we should account for all the costs involved in the printing job.

The importance of accounting for both fixed and variable costs is common business knowledge today. Fixed costs include those printing costs that we would incur before we even print one copy, for example what we paid for the press or the cost of the screen frames. Variable costs are only incurred in the job is being printed — operator wages, ink, media, etc.

But there is another dimension — indirect costs — that not everyone pays the required attention to, and that can be a costly mistake. While direct costs can be traced directly to the print job — that is, any costs-generating items that were directly involved in the job — indirect costs are trickier, and need to be manually allocated to the job in one of several allocation methods. For example, we would need to allocate the cost of receptionist, the electricity and rent for the office area, as well as many other items.

This allocation of indirect costs, or overhead, is tricky because there are many ways to go about it. Common practice is to pre-determine an overhead rate for the business. This way, we are able to estimate the total cost or the product or service immediately after its direct and especially variable elements are incurred. A more detailed process is to identify the major cost pools (marketing, electricity, depreciation, etc.) and then allocate a set rate of each pool to each product or service.

It is virtually impossible to relate this resource consumption to products or services accurately. Instead, what we should strive for is adequate measurement and allocation, so that we have enough information for accurate pricing and decision-making.

Why is this crucial? Because if we disregard indirect costs, we will quote the job based on a cost figure that is much lower than what it is in reality. And when we prepare our financials at the end of the quarter of year, that mistake will haunt us in the form of lost profit.

Let’s take a look at an example.

Imagine we need to print a standard four-color file on 300 pieces of a 4’x8’ PVC board. Assuming that the cost of each board is $0.30 per square foot, and that ink costs us $0.05 per square foot, does that mean one piece costs us $0.35 x 4’ x8’ = $11.20?

No, it does not. We need to identify all direct cost items, both fixed and variable: labor on the pre-press and printing side, electricity used by the press, consumables such as stencils and more. And then we’re done, right?

No we are not. We need to remember to allocate the indirect costs and overheads, and in this example we can example we can easily end up with a fully-loaded sheet cost of $20-25 per printed piece (let’s use $21 for this example).

Now just imagine what would happen if we would have priced that piece at $15, believing that its cost is as low as $11. At the end of the year when we do our financial reports, just for that job, we would be surprised to see our costs go up by at least $10 per piece or:
300 pieces x $10 = $3000 in total.

Our operating margin per piece would go from what we believed it was 

To what it really is:

To help our customers avoid surprises like these, we at HP Scitex, Hewlett Packard’s Sign and Display division, have developed the HP Smart Planner, a turnkey job estimation and business-planning tool. The tool — provided free of charge to users of our high-volume machines — enables the planner or production manager to accurately estimate job costs and compare and contrast digital and conventional output, using custom or supplied press profiles. It outputs a fully-loaded sheet cost and uses that cost for accurate pricing and production decision-making. Please register for more information at our Web site.

An interesting question regarding our example is the following: would we even want to print this job of 300 PVC boards on our screen press? Could there be another option? And what metric can help us as a decision tool? In the next column we’ll spend some time on job allocation and its effect on pricing and profit margins.

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