That Monday Morning Meeting
The advice in this classic IPI article by Larry Ruhlman, first published in 2000, still rings true today.
Early one Monday morning, you are summoned to your boss' office. You can't help but wonder why, since he's never asked to see you this early. The urgency of this request bothers you.
You run through a list in your mind of the projects you've been assigned. You've done everything you've been asked. You even volunteered to cut a few expenses to help the company's cost cutting measures.
As you enter his office you quickly note that the two of you are not alone. You are introduced to a member of the financial audit team and told to have a seat. A total review of your expenses is laid out on the table in front of you. The questions begin: How efficient is your department? How does your department's pricing compare with pricing of the local commercial printers? What system do you have in place to monitor your expenses?
You answer but can see that they aren't really buying what you're selling. Finally your boss slides back from the table and tells you that a comparison between your department and commercial printers has been made. He tells you that since you can't provide a comparison that shows your pricing is less than commercial pricing, the company has decided to close the in-plant. Shocked, you leave his office and wonder "where did I go wrong? Could I have prevented this closing?"
The answer is yes-maybe-no.
If you make no attempt to accurately charge back and reconcile your expenses and chargeback credits, you will never know whether your costs are in line. And if you don't know how accurate your costs are, your upper management sure doesn't know and will never know how valuable you are. So, yes you may have been able to prevent the closure.
The "maybe" comes into play if, even after you have done everything right, the company still closes your in-plant. We don't have absolute control, but we do have to try to do all the right things.
Not A Difficult Process
The process of setting up a chargeback is really not that difficult. You may find that the hardest part is to convince your financial organization, or even your management, that you want to directly charge for your services and receive an equal credit back to offset your expenses.
Be persistent. Don't allow your costs to be allocated equally across the company. Most corporate departments don't want an allocated expense hitting their department, especially if they never used your services. Those departments feel burdened with an additional overhead expense that may affect their bottom line.
Review Your Department
The first step in setting up your chargeback is to determine your rates. Start by reviewing your department spending reports. Group your spending into three categories: Labor, Material, and Overhead (LMO).
- Labor: Includes all direct labor salaries for your employees including all associated benefits.
- Material: Includes paper and all consumable materials, such as ink, plates, film, chemicals, etc.
- Overhead: Includes your expenses for building rent/occupancy and maintenance, phones, equipment rentals/leases and depreciation, equipment maintenance, and any other expenses that are not covered in Labor and Materials. Also include in this category the salaries for department management and administrative staff, including benefits.
Once you have those figures calculated, there are a number of ways in which you can use those costs to calculate a job cost. Depending on how detailed and exacting you want to be, there are several different ways to apply those figures.
If you are trying to establish a very basic system, the simplest way is to divide the total number of pages you produce in a year by your total LMO. For example: if you produce 10 million pages per year and your total LMO is $200,000, you should charge $.02 per page ($200,000/10 million).
This is a good place to start, but it also works well long term if your in-plant does only a few basic types of reproduction. The downside is that all jobs are charged at the same page rate with no differentiation for complex jobs.
If your in-plant produces a higher volume of work, and jobs of varying complexity, you may want more accurate job costs. Although there are many ways to calculate these rates, using some averages helps.
For example: Calculate your department overhead rate as an average by dividing the total overhead by the total number of pages, again using annual or annualized figures. Using the same figures from the Basic System, if your total overhead is $50,000 and you produce 10 million pages, your average overhead cost is $.005 per page.
To calculate your labor, determine which equipment costs you more money to operate. For example, a four-color press costs more to operate than a single color duplicator. If this fits your in-plant, divide your production into various "cost groups" and apply different rates to each.
For example: Let's say you have two distinct groups, a press group with a total annual cost (salary + benefits) of $50,000 and a copier group with a total annual cost of $25,000. Each group produces exactly half of your production (5 million). The press group labor rate is $.01 per page and the copier group labor rate is $.005 per page.
Finally, your material cost in this example is $75,000 annually, but two-thirds of this material is used for jobs produced by the press group. The press group material rate is $.01 per page ($75,000 x 2⁄3 = $50,000/5 million). The copier group material rate is $.005 per page ($75,000 x 1⁄3 = $25,000/5 million). Now total these rates for each group:
- Press Group: Labor $.01 + Material $.01 + Overhead $.005 = Total Cost per Page $ .025
- Copier Group: Labor $.005 + Material $.005 + Overhead $.005 = Total Cost per Page $ .0150
You can now see that jobs produced by the press group will cost more than those produced by the copier group. Of course, you can make your system even more detailed by charging each job with the exact number of labor hours and materials consumed, but be prepared to spend a lot of time managing that system.
Cover All Expenses
If you are unable to sell the idea of a chargeback system to finance or upper management, start your own system, just like you would if you were actually charging for your services. See if you are covering all of your expenses and make comparisons with local commercial printers.
Once you have a system in place, you must perform a monthly analysis of your expenses and charge back. Your goal is for the chargeback to equal your total expenses. If you aren't covering your expenses you have to increase your prices. The tricky part is the break even balance; most corporations won't allow you to profit.
Make these chargeback figures and reports available to your management. Convince them that you are saving the company money, and they will be more prepared to support you during hard times.
I personally just had the importance of a good chargeback system driven home. In an effort to reduce overhead, my company performed audits of several service groups. The outcome was that the in-plant survived while others were closed.
One of the primary reasons was that our in-plant had a very effective chargeback system in place for 10 years and could prove that all expenses were being covered and that internal costs were less than commercial alternatives. We even went one step further and started insourcing commercial printing to further offset costs and to generate profits.
If you've had to justify your existence before, you know it's a difficult and unpleasant experience. If you haven't been placed in this awkward position before, make sure that you're ready when the time comes. You can't leave anything to chance. Even if your management doesn't think it's necessary to begin a chargeback system, start one anyway.
You are the person responsible for managing the in-plant business within your corporation, and you can't do that effectively without a sound financial system in place.
Be ready for the Monday morning meeting.
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