Evolvement of The Traditional
Cost System.

The primary emphasis of a company's cost system should be to provide relevant and reliable information for management decision making rather than focusing only on financial reporting requirements. A company that does not have a proper cost system and cannot identify all of the cost of making its own products is like an unguided missile. So it is with a cost system in itself. It may take off but nobody knows where it will land. A company that cannot predict in advance the amount of profit it will earn, must wait until the periodic profit-and-loss statements are published — which may be too late.

Many companies operate on the basis of poor cost information. That doesn't mean that these companies have poor production methods. What it does mean is that regardless of their methods or the degree of streamlining in their plants and offices, the product costs are not an effective guide to their pricing or other decisions.

The Big Problem.

Overhead costs are not directly identifiable with specific products. This makes determining the exact dollar amount that should be added to a product's labour and material cost for exact overhead recovery a major problem. You cannot see the piece of the manager's salary in the product, nor the machine's depreciation expense, nor the cost of the material handlers who came in contact with the product.

Over the years many cost system formulas have cropped up to provide for overhead expenses. Each formula claiming an ability to allocate the proper distribution of overhead expenses. Accurate cost finding has been hampered by unnecessary complications and illogical theories. Shortcuts, formulas, magic numbers, factors and percentages confused the cost finding process and generated tons of paperwork. Often these methods arise out of a need for quick quotations, and management never does recognize product costing as a science.

Once the idea of the magic number becomes implanted, it is hard to pry loose. It becomes even more difficult to do when owners see a profit figure on am Income Statement as proof of their judgment in applying overhead. Unfortunately, the use of the magic number does not find costs, it forces them. Overhead gets spread with a bulldozer, filling in holes and levelling peaks. Management is victimized by the current shortcut formula and alternately rides the peaks of profit and loss as the overhead formula approaches or departs from actual costs.

Solution.

With activity-based costing managers can achieve a detailed perspective on the business side of their operations, while most printing companies use some kind of costing procedure to improve their manufacturing efficiencies, they have largely ignored accurate costing procedures for improving their business operations. Direct costs such as press time or bindery operations are easy to identify and charge to an individual customer or project.

Support costs such as time spent by estimators and CSRs are generally totalled from payroll and assigned as a lump sum into general overhead. Once support costs are buried into general overhead every job written ends up with the same dollar cost assigned to it. For example, an order that requires 10 estimates, 10 sales calls and 30 CSR telephone calls is assigned the same support cost as a job that didn't required any estimate, sales or CSR call.

ABC by Estimator Corp provides a method of gathering and accurately assigning these costs. With the accurate recording of these costs management can easily differentiate between profitable and unprofitable customers and adjust their charges on an individual customer basis.