Chargeback- Critical To Your Survival

If you've been "getting by" for years without charging back, it's time you faced facts and started doing it—otherwise you can't prove you're cheaper.

To many, the thought of initiating a chargeback system brings to mind accountants, ledgers, difficult formulas—but it shouldn't. Chargeback systems are not difficult to set up and are easy to administer once you determine your standard rates. Regardless of how difficult you may find this process, at some point in time it may very well be the saving grace for your internal printing operation.

The printing cost is divided into three primary categories: Labor, Material and Overhead. For those of you who are fortunate enough to be able to profit from your work, the fourth category of your printing cost would be Profit. Taken one step at a time, it is relatively easy to calculate your costs.

Get A Spending Report

Spending reports are the best place to begin to determine the cost basis for Labor, Material, and Overhead. If you do not receive a spending report each month from your financial organization, check with your upper management to see if they get a report, and finally check with finance to get their assistance. Begin by reviewing your expenses for the last 12 months and calculate the monthly average for each account. Divide the accounts into one of the three categories (Labor, Material or Overhead) and find the sum of each category for the average month.

Labor: The total labor cost is the sum total of all labor, benefit and temporary labor accounts. You should be looking at an average monthly total. Now determine how many hours were available to work? There are a total of 2,080 hours available per year, if you have 15 employees you have paid your employees for a total of 31,200 hours annually or 2,600 hours per month. Divide the average monthly labor expenditures by 2,600 to get the average hourly labor rate.

Example 1: If your average monthly labor expense is $40,000 and there are 15 employees: $40,000/2,600 = $15.38 per hour

You can then go one step further and calculate the labor rate per page of printed material. Divide the hourly labor rate by the total number of pages produced per hour. (Note: when you calculate a cost per page, you will always be dealing with a cent or fraction of a cent. I find it more accurate if I express those fractions as four-digit decimals.)

Example 2: If your hourly labor rate is $ 15.38 and your average production for a machine is 5,000 pages: $15.38 / 5,000 = $0.0031 / page

Now that you have determined your average hourly labor rate, you have to decide whether you want to apply the same equal rate to all areas of production. The simplest approach is a standard hourly rate, however, there may be some processes that you want to charge at higher or lower hourly rates. To do that, add the appropriate salaries together with a percentage of the benefits and you will have an hourly rate for that specific process. Then follow examples one and two to revise your average costs.

Know Your Production Rate

In addition to the labor cost you need to know the average hourly production rate for each piece of equipment. It will make other calculations easier if the production is measured in pages per hour instead of the traditional impressions per hour and will be easier to administer.

You need to have a system in place to capture daily production. Once you have your average monthly production figure, you are ready to calculate your standard material and overhead rates.

• Material: Calculate the average monthly expenditures for all printing materials and supplies.

• Overhead: Calculate the average monthly expenditures for all overhead related expenses such as rent, utilities, phones, taxes, etc.

Example 3: If your average monthly expenditure for material was $50,000, your average monthly expenditure for overhead was $20,000, and your average monthly production was 5 million pages:

Material: $50,000/5,000,000 = $0.01 per page.

Overhead: $20,000/5,000,000 = $0.004 per page

We have now covered all 3 components of the printing cost. Your total (average) cost per page is the sum of the Labor, Material and Overhead costs per page.

How do you apply these rates to determine printing costs? There are a number of methods, from manual systems to automated databases. The volume of production and the number of jobs you produce will determine which type of system you need.

If you are producing 50 jobs a month, a manual system will work, but if you are producing a few hundred or more jobs a month an automated system is the only way to go. Regardless of the method you choose, the process is the same.

Example 4: To calculate the cost for a job containing 24 pages with a quantity of 5,000 copies:

Labor: 24 x 5,000 = 120,000 total pages x $0.0031 = $ 372.

Material: 24 x 5,000 = 120,000 total pages x $0.01 = $1,200.

Overhead: 24 x 5,000 = 120,000 total pages x $0.004 = $480.

Total cost: 24 x 5,000 = 120,000 total pages x $0.0171 = $2,052.

I have outlined a very simple approach for you to determine your job costs. You should cost all jobs produced in your in-plant, whether your corporation officially acknowledges your chargeback system or not.

The fact is, it makes good business sense to know what your costs are and what you are charging for your work. Without this knowledge you have no basis for knowing whether you produce jobs less expensively than commercial printers. The bottom line is IT'S YOUR JOB TO KNOW.

The survival of the in-plant is often dependent on internal cost savings and if you do not know how much you're saving, you certainly can't defend your operation. So, don't wait until you are asked what your costs are. Be proactive. Find out now and prepare yourself for the future.

by Larry Ruhlman

Larry Ruhlman manages the corporate printing department of Intergraph, a Huntsville, Alabama-based Fortune 1000 company that supplies interactive computer graphics systems. He has 22 years of experience in the printing industry, primarily in printing management. Reach him via e-mail at loruhlma@ingr.com. You can also write him at Intergraph Corporation, Mailstop CR053, Huntsville, Alabama 35894-0001.