How accurate are your cost rates?

Let this simple guide show you the basics of costing

In 2006 John Roche authored the BPIF's publication Costing Principles & Guidelines. To obtain your free copy simply click on this link.

Inside you will find details of all the most common practices and protocols relating to costing, including absorption costing, marginal costing and activity based costing. Here is a brief excerpt from the publication:

"It is true that the printing marketplace is increasingly dictating the price at which the average printing company can sell. Does this mean, then, that the function of basic cost calculation has become redundant? Hardly. Cost rates form the basis of almost every financial calculation performed by a contemporary management information system. As the marketplace has driven prices lower and lower, however, printers have occasionally lost sight of their true costs, often adopting hybrid cosmetic ‘cost’ rates whose singular purpose is to pump out superficially low prices.

Printers frequently ask the question, “What is the point of calculating cost rates, when the market is dictating prices?” A fundamental tenant of any business is to understand how its model of costs differs from the demands of its marketplace. There is no point operating a business when the market demands lower prices than the cost of supply. Therefore, a printing company should first determine its business cost model and then compare it to the marketplace. Where it is discovered that its costs exceed the market expectation, solutions must be found in order to reduce costs and improve competitive advantage. This might come in the form of reformatting business processes, improving efficiency, restructuring the organisation or better management of costs.

Accurate cost rates, though, are difficult to pin down. Moreover, it is generally considered unfeasible to determine the absolute cost of running a piece of equipment (or offering a service) for any given hour or minute of the day. Costing, then, (defined here as the calculation of cost rates) is, by definition, an imprecise art. Why should this be so?"

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