Print Cost Recovery
While every aspect of a printing business can affect its profitability, including accurate estimating and the ability to fill capacity, if the cost recovery rates in use do not accurately reflect the actual costs of production and are later found to be under recovered, then losses are a likely consequence at the end of a given period.
Some firms may attempt to overcome such an eventuality by adding a sizeable profit to the total estimated cost as a safeguard on quotations submitted to clients. This might be reassuring but it has its limitations. In a competitive environment and with a perceived need to obtain work, there is a considerable temptation to reduce prices (charges) in the belief that there is scope for a profit reduction to fill future capacity. This also assumes the estimated times are accurate and that these will be matched in actual production. Most firms would not wish to risk the future of their business on such a policy when accurate calculation of cost recovery rates should largely overcome such an outcome.
In a scenario where the use of cost recovery rates is subsequently found to be under recovering cost, the consequences of not correcting this can be considerable: printers cannot return to past clients and ask for a further sum! However, where an order deviates from that estimated, then some recovery is possible in certain circumstances; please see article ‘Maximise profits with an accurate specification’ on the Estimator Training website www.estimatortraining.com.
The scenario outlined above can be exacerbated where there is an overall impression that a printer is doing well as it has a full order book producing more profitable work (thus justifying a necessity to reduce the profit in the instance quoted above). A casual observation that everyone in the works appears to be fully engaged in production and running to full capacity, can imply costs are being recovered and profits secured when this may not entirely be the case: this outcome is less than desirable. What is needed is a simple means of forecasting, calculating cost recovery rates and constant monitoring of those costs so that the anticipated profit is found to be fact. It used to be the case - in the
UK printing industry at least - that the more extensive the procedure of cost control is in a firm, the more successful that firm was.
Some firms obtain unit cost rates and then apply these to calculate cost recovery rates by determining the cost of premises, capital, power and wage costs to various operations and machines in the business. The cost recovery rates are then used to estimate for new work and to determine the costs of work in production: these should be monitored.
This offers a measure of cost finding and control and is particularly useful if comparison is constantly made with the actual - ‘direct hours’ - (and other rates) recorded against jobs in production. Direct hours are those considered to be recoverable at the time of budgeting and should be used to determine cost recoverable rates: these are not to be confused with indirect hours or hours paid to employees. If overtime is paid in lieu of ordinary time this will result in an overall deficit whereas if overtime is on top of ordinary time, this should provide an over recovery of costs. This distinction is important, particularly where a firm provides the appearance of working to full capacity.
Multi-shift working on expensive machines should reduce hourly cost recovery rates, providing, of course, a constant volume of profitable work is obtainable. Management decisions on whether this is a viable option should be made on a detailed analysis of all costs (probably based on the absorption costing methods) where this is deemed to be suitable and incurred by a firm and not merely on the use of unit cost rates as outlined above.
All costing systems seek to relate costs of running a business to the work produced. In an industry where the unit of production is the same or similar this is not too difficult (for example, the production of electric light bulbs). However, the units of production in the
UK printing industry (at least) are likely to vary according to the requirements of each job and from different clients: no two hand or machine operations being the same in terms of work content. The only unit of production common to all jobs is ‘time’: the direct hour. Absorption costing has, for decades, met this requirement. This was particularly relevant where ‘origination’ was an indefinable variable of several parts. These were those many productive operations that took place for example, prior to making ready and obtaining the first printed sheet off a printing machine. Nowadays, many litho printers receive a client’s origination in digitised form with the claim that it is (almost!) ready for printing down. With some of the origination variables removed, there could be grounds for taking the ‘process’ or ‘marginal’ costing approach for print machining and print finishing operations. Although it has to be said that many years ago, such an approach often led to disastrous consequences.
While for costing uncertainties in cost recovery can arise and continue, for estimating, help is at hand. In the process of estimating for work – the accuracy of which is crucial for the success of a printing business – the requirement is for determining the cost of materials and times taken by the production processes in advance of the job being required. These aspects, amongst others, are comprehensively dealt with by Estimator Training on their Distance Learning course to be found at www.estimatortraining.com. This course has been offered to UK-based firms for many years and is now offered via the web using the advantages of the email in providing answers to questions that might be asked in class.
Estimator Training provides career enhancement and opportunities in the printing industry with our distance learning course. If you wish to find out more, please read our course information page.
If you have any questions about the information on this site or our distance learning course, please do not hesitate to contact us.
. 16 Oct 07 | News