Does Cost-Based Pricing Really Remove Guesswork?
One of the promises often made about cost-based pricing is that it takes the guesswork out of quoting.
I don’t think that is quite true.
Costing is useful, but we need to be careful about what kind of costing we are talking about.
For decision-making, the most important starting point is usually the Truly Variable Cost of the job.
That means the costs that genuinely increase because you accepted that specific job. Things like paper, board, vinyl, ink, outsourced work, special tooling, courier charges, or other costs directly triggered by the order.
Those costs matter because they are real cash consequences of taking the job.
But once we start adding labour rates, machine rates, rent, electricity, admin salaries, management costs, factory space, and other overheads into the product cost, we are often no longer dealing with direct reality.
We are dealing with assumptions.
Guess Upon Guess
Absorption costing tries to spread overheads across products, machines, departments, or productive hours.
That sounds neat and scientific, but behind the scenes it is full of guesses.
You are guessing how busy each machine will be.
You are guessing how many productive hours you will actually get.
You are guessing which overheads belong to which department.
You are guessing whether rent, admin, management time, electricity, downtime, and factory space should be absorbed by hours, square metres, machine time, labour time, or some other rate.
Each guess may seem reasonable on its own. But once you stack guess on top of guess, you do not remove uncertainty.
You multiply it.
It is a bit like rolling dice.
If I ask you to guess which number I am going to roll on one red die, you have a one in six chance of being right.
But absorption costing often feels more like this: I give you twelve dice, each a different colour, and ask you to guess what number each one will land on.
Your chance of being exactly right becomes much smaller.
That is my first problem with absorption costing.
But it is not the biggest problem.
The Real Damage Happens on the Production Floor
The bigger problem is what absorption costing does to the production floor.
A printing business is not just a collection of separate departments. It is a system.
And in a system, work flows through dependent steps.
A customer sends artwork.
The artwork must be checked.
A proof may need approval.
Tooling may need to be ordered.
Materials must be available.
The job must be printed.
Then it must be cut, finished, packed, delivered, and invoiced.
Each step depends on another step.
And in every chain of dependent steps, one step is usually the slowest.
That slowest step determines how much the whole factory can actually ship.
That point is huge.
Your business does not ship according to the combined busyness of every department.
It ships according to the output of the limiting step.
Your Constraint Controls Your Output
So if your constraint is die-cutting, then making prepress busier does not increase output.
If your constraint is finishing, then pushing more print through the factory may only create a bigger pile of work waiting at finishing.
If your constraint is approvals, then faster machines won’t fix the real problem.
This is where absorption costing can become dangerous.
Because once every machine and department has an hourly rate attached to it, managers start trying to make every department “recover its cost.”
Everyone must be busy.
Every machine must run.
Every department must show productivity.
But if a department is not the constraint, making it more productive does not necessarily make the business more profitable.
It often just creates more work-in-progress, more chasing, more schedule changes, more urgent jobs, more half-finished work, and more chaos.
Has anyone bought a bigger, faster, fancier printer, only to discover that turnover did not meaningfully improve?
That is usually because the printer was not the real constraint.
What People Actually Do Under Pressure
In theory, absorption costing gives management control.
In real life, when the factory is under pressure and jobs need to get out, people quietly abandon the theory.
They stop asking whether every department recovered its hourly rate.
They start asking the practical question:
What must move now so we can ship?
And that is the right question.
A good pricing decision should start with the Truly Variable Cost. Then it should ask what contribution the job makes after that cost is covered.
But pricing still needs judgement.
It needs judgement about the market, available capacity, urgency, customer value, strategic fit, and most importantly, the constraint in your business.
The goal is not to keep every machine busy.
The goal is to ship more profitable work, with less chaos, through the limited capacity that actually controls your output.
Costing matters.
But flow matters more.
So What Should We Talk About Next?
I know this probably raises a few questions.
Some people may be asking: “So how do I know what my slowest process is?”
Others may be asking: “If not absorption costing, then what method should we use?”
Those are exactly the conversations I’d like to have.
So I’d love to hear from business owners, estimators, production managers, accountants, and anyone working in a real factory environment.
Do you agree with this?
Do you think I’m missing something?
Do you think absorption costing still has a useful place in pricing decisions?
Or have you seen the same thing I’ve seen: that pushing every department to be “productive” often creates more chaos, not more profit?
I’m very happy to be challenged on this.
In fact, I’d welcome it.
If there is enough interest, I’ll write the next article around the questions and pushback I receive.