How Budgeted Hourly Cost Rates almost put a printing company out of business.

Case Study - "We learned our lesson the hard way."

An essential tool for being a successful printing or packaging organization is budgeted hourly rates (BHRs). Inaccurate BHRs can put an organization at risk by making them less competitive, less profitable, and less productive as Quality Printing found out in the following case study:

Quality Printing* is a digital and offset printing company with 45 employees located in the Midwest United States. Quality Printing purchased a new Management Information System 3 years ago. Budgeted hourly cost rates were indiscriminately created in order to implement the estimating and job costing software.

For 3 years, Quality Printing continued to produce estimates and job cost reports using the original BHRs with minor changes. When they finally updated their rates using Cost Rates Advisor, they found that their old rates had significantly impaired revenue, profit margins, and growth. Quality Printing had unintentionally been deceived by the estimating figures used for pricing, and the job cost figures used to measure job profitability. Below is a summary of their findings:










Using their old BHRs, smaller jobs were being under-estimated by 4.2%. Unknowingly, Quality Printing was selling smaller, short-run work below their cost. This was causing the organization to drift towards smaller, less profitable work, which required more administrative costs and machine setups to produce orders, and ultimately lowered the organization's profits and efficiencies.

Quality Printing also found that larger, more expensive jobs were being over-estimated by 10.2%. The old rates caused Quality Printing to overprice and lose a substantial number of higher priced, more profitable quotes over the years. This also caused excess capacity and lower levels of productivity in the shop.

"The BHRs we calculated by Cost Rates Advisor has provided insight to our real costs. We have more faith in our estimates, which has helped us shrewdly price jobs, be more competitive on profitable work, and shy away from less desirable work. We're now processing less orders, but at much higher profit margins. We learned our lesson the hard way. Now we update our BHRs at least annually!" -  John, President

If Quality Printing had not updated their BHRs with Cost Rates Advisor, they would have continued to lose profits and would have eventually gone out of business.

Why Profitable Printing Companies Cost Jobs

Studies show that highly profitable printing companies implement job costing practices. Job costing is the processes of tracking the actual cost incurred to produce an order or job and benchmarking it against revenue. Job costs include labor, equipment, overhead, materials, outside services, and other manufacturing costs.

The benefits of job costing are significant. Using job costing will allow you to identify the most and least profitable areas of your business, so that you can focus on the profitable elements, and try to make the less profitable aspects of your business more efficient. It enables you to hone in on the cost performance of individual jobs, products, customers, production equipment, departments, employees, and your overall business.
   
Job Costing with Budgeted Hourly Cost Rates (BHR)
Budgeted hourly cost rates are an important component of establishing a job’s cost. Budgeted hourly cost rates are a best practice used by the printing and packaging industry for over 100 years. A budgeted hourly cost rate is your out-of-pocket cost associated with each piece of production equipment in your shop. Budgeted hourly cost rates are comprised of operator and helper wages, benefits, rent, leases, equipment depreciation, supplies, utilities, insurance, administrative costs, overhead, and other expenses.

The objective of BHRs is to recover 100 percent of your costs with the production equipment and labor hours you bill out (i.e. prepress, platemakers, presses, digital copiers, wide-format printers, cutters, folders, handwork, etc.).
  
Budgeted hourly cost rates software such as CostRatesAdvisor.com helps printing companies calculate their hourly cost rates using industry formulas and best practices.

Record Keeping
There are several approaches for tracking job costs. The simplest and least expensive method for tracking costs is to have employees write their time on the back of a job ticket or a production time card form. Upon completion of each job, multiply the hours worked by the production equipment hourly cost rate and run a total to get the job’s total cost.

A more efficient and accurate method for tracking job costs is putting computers on the shop floor for the employees to record their activities. There are over 50 shop data collection software products on the market to choose from, varying in capabilities, and ranging in price between $199 and $50,000.

Reporting
There are several key detail and summary reports a company should have for analyzing job costs.

An "Estimate verses Actual Report" is the most important job costing report. It compares a job’s estimated costs to actual costs, identifying any cost variances for each phase of a job, the profit earned on the job, and inefficiencies in estimating or production costs. The results will help you to create more accurate and profitable quotes for future jobs; or improve your production processes. An Estimate verses Actual Report will also help ensure that the customer is properly being invoiced for all the work you did.

https://www.printersadvisor.com/

 

A job costing summary report that shows cost variances for a range of jobs by product type is essential for determining your most profitable products (your niche), where you need to improve, and support future pricing decisions on similar products.

A job costing summary report that shows a range of jobs by customer will identify your least and most profitable customers and can be a catalyst for future pricing and markup strategies for individual customers.

Other Benefits
Profitable companies have experience many other benefits of implementing job costing including:

• Forecasting costs and resources necessary to provide particular services or products
• Defining sales and marketing strategies for products
• Measuring and improving the performance the operation
• Support for future equipment investments
• Identifying spoilage and defects to take corrective actions

Job costing provides knowledge that can make your business more profitable and easier to manage. When done well, it separates the profitable companies from those that struggle to make a profit.

 

By: Craig L. Press
President, Profectus, Inc.

 

To try CostRatesAdvisor.com BHR software for FREE or for more information visit our website http://www.costratesadvisor.com/

 

Why Every Printing Organization Needs To Update Their Budgeted Hourly Rates

 

An essential tool for being a competitive and profitable printing organization is budgeted hourly rates (BHRs). Budgeted hourly cost rates distribute 100 percent of an organization's expenses among each piece of production equipment so that all costs are fully absorbed and accounted for in estimates, price quotes, and job costs. Accurate BHRs which reflects true out-of-pocket costs help printing organizations intelligently and competitively price jobs.

BHRs are comprised of direct and indirect costs including wages and benefits, building costs, leases, equipment depreciation, repairs and maintenance, utilities, insurance, office supplies, production supplies, sales expenses, and other costs. These costs are then distributed among each piece of equipment using various formulas and accounting principles.

Companies can calculate their budgeted hourly rates using spreadsheets or hourly cost rates software such as the Cost Rates Advisor www.costratesadvisor.com. An organization should update their BHRs at least annually or anytime there are significant cost changes including equipment purchases, wage increases, personnel changes, increases or decreases in revenues, or other major cost fluctuations.

 

Maintaining current BHRs enables organizations to be more competitive on the desirable and profitable work, and avoids the less lucrative work as shown in the case study below:

This printing organization didn't update their budgeted hourly cost rates for over 3 years. When they finally updated their rates using the Cost Rates Advisor, their press rates increased and their prepress and finishing rates decreased.

With their old BHRs, smaller jobs were being underestimated by 4.2% and larger jobs were overestimated by 10.2%. This was causing the organization to drift towards smaller less profitable work, which also created excess capacity and lower levels of productivity in the shop. The old rates also caused them to lose a substantial number of larger quotes over the years.

The new BHRs made the organization more competitive on larger jobs with higher profit margins, increased the productivity of the shop, and eventually reduced their cost rates because of improved utilization.

If the organization had not updated their BHRs, they would have continued to lose profits and miss out on the more lucrative higher margin quotes.

 

Click on this link for more information about the Cost Rates Advisor budgeted hourly rates software http://www.costratesadvisor.com