Where's your production money going? - budgeting approach

Where's your production money going? It's one thing to draw up a budget and quite another to use it for more than filing-cabinet ballast. Too often the budgeting process begins and ends with a frantic session spent gathering rates, assembling assumptions, and hurling both set of numbers into a spreadsheet. After the budget is done, you sigh with relief and get back to what's called real work.

When a manufacturing budget does nothing more than satisfy an interest in glancing at a projection of the year ahead, it's not much of a tool. But if it can help the publisher and production manager make decisions and refine the year in progress, it's worth a good deal. If it's going to do that, the budget must help you make decisions that include veering from assumptions and changing the conditions that rendered some assumptions incorrect. A budget of this type is an ongoing document, showing both anticipated and actual costs updated for each issue. (See Figure 1 for an example.)

The kinds of decisions such a budget supports involve adjustments in production values, vendors and volume. Production values define what you buy along a spectrum of quality and features; vendors determine the price you pay; and volume dictates how much you buy. A skilled production manager can use a budget to tell the ad director exactly what all those color positions are costing. Or he can select a new printer with a conscientious price comparison. Finally, he can, if stout of heart, monitor his own performance and purchasing efficiency.

If budgets inspire dread for any good reason, it's their potential for showing their creators in a bad light. A budget gives someone else a yard-stick to measure your performance--or mismeasure it, often enough. In precisely the same way the budget may mislead those assessing your buying powers, it may also obscure money-saving choices open to you. It has these nasty tendencies because there are always several reasons for the differences between actual and budgeted costs. The heart of a budgeter's surveillance program--reviewing variances--can be nothing more than a plunge into very, very murky waters.

Variances are supposed to pipe up and tell us what's wrong and where. They're supposed to show us if some purchasing component is out of line, or if the production manager is particularly brilliant, or if the magazine has drifted awa, from its budget in a dangerous way, requiring immediate rescue. But what if the variance figures are less than lucid reports?

Understanding the concept

When analyzing actual costs against budgeted expenses, you need to determine whether actuals vary from projections because of an increase or decrease in volume, in usage, in prices or in efficiencies of purchasing. Any time the budget projects an issue of 128 pages and 50,000 copies and the actual book comes in with 160 pages and 65,000 copies, you know volume alone accounted for a very hefty variance. Without a tool for adjusting variance for volume, anyone is tempted to squint at the variance, assume it's all due to the climb in pages and count, and scrutinize the numbers no further. In other words, for most analysis, a change in volume will lead to no review or decision in response to a variance in cost.

Adjusted variance techniques attempt to isolate changes in prices and efficiencies of purchasing so that useful analysis can follow. Variations in prices and in purchasing skills are factors we want to see clearly, after pulling away the veil of volume and usage changes. We'll assume that changes in volume (in pages and counts) are the result of advertising or circulation efforts, and although a budget attempts to forecast accurately all factors bearing on costs, no specific production decision arises from volume fluctuations. Then we'll assume that changes in usage (in color, placement, and other refinements) are the result of editorial and advertising choices. Production must respond by seeking the greatest efficiency in purchasing, and a budget should help isolate that ability from usage alone.

The basic premise of adjusted variance is that our budget sets a rate that we've all agreed is acceptable to pay; when we buy a little more of something, at the very same rate, we've got nothing to worry about. In parallel, the budget had better alert us if volume drops but costs don't.

When rates behave in a linear way, as they do for all per-thousand or per-copy costs, we can adjust variance easily and accurately. We express the net variance between budgeted and actual volume as a percentage, and then use that percentage to scale the actual cost.

For example, if we've budgeted 50 editorial pages but actually print 55 in the issue, we've increased volume by 10 percent. If the budget included a projection of $6,000 for separations, and the actual cost was $7,000, how much of the variance is due to something other than that volume change? By strict rate logic, we're theoretically willing to spend 10 percent more on separations for 10 percent more pages. The adjusted variance would be $400, based on the net variance of $1,000 less 10 percent times the budgeted amount. The formula would read: net variance-(percent variance x budgeted amount) = adjusted variance. In this example, an actual separations cost of $6,600 would be shown as zero variance. The $400 adjusted variance is the number we want to examine--and the number we don't want to miss by assuming that all the variance was due to a page increase.

Adjusted variance, as you've seen, pares away differences in cost that we've decided in advance are acceptable. As you get deeper into the process, remember that everything you adjust out disappears from scrutiny. Choose your rules carefully, and then consider the assumptions beneath your rates. For example, page-oriented volume changes don't behave over all types of pages equally. Unless your magazine is unusual, ad and edit pages differ greatly in pre-press costs. Sometimes you'll have a subdivision--for example, a classified section--that has yet another set of pre-press rates.

The linear structure of page-oriented rates will still break down, even after you define different page types. In the prior example we added five editorial pages, but if they were all for the year-end article index and sported no color, that 10 percent jump should not have accounted for any of the increase in separations. One can take this logic only so far, of course, and I counsel you to observe the fullness-of-time doctrine, which presumes that an exceptional number of things have a way of balancing themselves out without any help from us. Nevertheless, think about these pitfalls, since they will distort your analysis. And assemble your rate assumptions wisely to assure that straight, linear adjustments will remain reasonably accurate.

Purely count-oriented volume changes take place in some binding and finishing operations, excluding their makereadies. Because of the distinct costs for mailing and bulk shipment, you'll want to separate changes in newsstand or subscriber counts for adjusting variance to study distribution operations. Again, the basic percentage premise works properly here, using the count variance to adjust the cost variance.

Beyond percentage adjustments

We've just reached the point where the detective muses, "It's quiet--too quiet." Adjusting variance on a percentage basis is simple--too simple. Costs such as press and paper makereadies have a tricky relationship to page volumes. Adding eight pages to a 120-page issue actually allows it to run more efficiently, since it could use all 32s. Thus, the eight-page increase of 6.66 percent will not result in a legitimate 6.66 percent increase in costs.

Further, consider the distortions in usage changes. An increase in color pages from 89 to 96 may require no additional costs if the imposition permits the most economical placement, even though it's about an 8 percent increase in color pages. Yet an increase from 96 to 97, a microscopic percentage jump, could require that a new signature be opened for color, at a relatively great increase in cost.

Both these examples point out the nonlinear nature of print pricing. Because price structures of 8s and 16s, 4/1s and 4/4s, or sets of bindery pockets all include sharp tiers, a linear variance adjustment will obscure essential purchasing decisions.

We've been trained from grade school onward to use percentages to draw relationships between numbers, and perhaps it seems unsettling to use a different method, but printers simply don't price their work for straight-line increments. To cope with this, we can make up tables that express the cost differentials in our work. We'll use these tables, instead of straight math, to calculate adjusted variances.

As you'll see in Figure 2, a differentials table is founded on a base magazine printed the most efficient way possible. If you want to observe the cost of color and color placement, the base book must be all black, with color elements presented as differentials. If you use color everywhere, that's your base. Note that the differentials also show the cost of splitting a 16 into two 8s to position color or accommodate an insert, and the cost to add each size signature.

With a table like this at hand (or, better yet, in a corner of your spread-sheet), you can adjust variance for volume changes. There are two components of volume: a count change, which acts in a linear, percentage-driven manner, and a page change, which operates in tiers. Press, paper and bindery running costs are sensitive to both page and count changes, while their makereadies need adjustment only for page fluctuations. Count volume will continue to act in a linear manner, but now you can calculate it on both the projected pages and the added or subtracted pages. (See figure 3 for a complete presentation.)

With a differentials table, you'll substitute specific costs for percentage adjustments. For example, if the budgeted makeready cost is $5,500 and the actual is $6,000, we have a $500 net variance. Let's say there was an increase of eight pages over 124 budgeted pages. That's a 6.5 percent increase, and percentage math says we'd be allotted $358 toward adjusted variance ($5,500 x .065). The differentials table is a bit more accurate, reporting that each eight pages we add carries a $400 makeready. Note that this accuracy becomes particularly telling when we add pages to other base totals: eight more above 132 is 6 percent, while adding eight to 112 is a 7 percent jump. Why use percentage relationships when we purchase printing in whole 8s? In this example, $400 of the $500 net variance is attributable to adding eight pages, and we know that precisely $100 is due to some other phenomenon, worth tracking down independently.

If you're cringing a little at the added effort this system seems to imply, consider how a spreadsheet can simplify it. Create the differentials table and name each result in it, such as "press MR add 8" and "16 4C in 32." After you load the actual totals, a formula can run off to fetch the appropriate numbers from the differentials table and calculate the adjusted variance. For example, the makeready formula would read roughly: (actual press MR-Budget press MR)-(IF(net page var = 8, press MR add 8, (IF(net page var = 16, press MR add 16)),0)).

Note the nested IF statement, which might well have to continue to permit the full range of additions you might experience. In fact, it has to be a bit longer to cope with the possibility of reductions in pages, when its syntax requires that a negative number in the net page variance result in an addition to the net cost variance. (And you thought you'd sneak by! Yes, some variances must be adjusted upward, not downward.)

Now let's tackle the adjustment in running costs. Please refer to Figure 3 for the numbers in this example. The straight percentage adjustment for count works on the budgeted presswork cost. Here, a 2.07 percent climb in copies is worth about $342, or 2.07 percent of the $16,500 budgeted for presswork. To that, we'll add an adjustment for the eight extra pages. The differentials table says each additional eight carries a $16 per thousand running rate, so we'll multiply the actual pressrun by the rate to find the adjustment. When the two numbers are combined ($342 and $1,435), we can subtract a total of $1,777 from the net variance to obtain an adjusted variance of $504.

Once again, a nested IF statement in a spreadsheet will automate these calculations. The core of the formula would read: (actual presswork total-budgeted presswork total)-((IF(net page var = 8, (pressrun/M add 8 x press-run))) + (% var pressrun x budget pressrun)). Remember to add the other necessary if's, and to account for decreases in pages and count as well.

Try lookup statements

Because the formula here gets unwieldy, you may want to use lookup statements instead of if's. To provide for that, make a lookup table of possible page increases and decreases, taking care to show the decreases are negative numbers. Across from each page count, list the makeready and running differentials. For all the negative page numbers, show a negative value for the increment from the differentials table. Then the second half of the formula would read roughly: (lookup (net page var, [column or offset for per M rate]) x pressrun) + (% var pressrun x budget pressrun).

Adjusting for usage

If you'd like to adjust for color usage or other refinements, the same principles apply, but operate from other items in the differential tables. Figure 2 shows an example of the extra cost of color pages and color position. Your printer's price schedule may require some interpretation to fit into a differentials table, but you can find a way to isolate the additional costs to obtain certain features. For example, if the printer prices color on a per-page per-color basis, you'll need a table that works in individual pages, not web sides, as in Figure 2.

To analyze usage, your table must show the most economical way of adding color, even though your imposition may not permit such usage. This means that the remaining variance reveals your purchasing skill and imposition selection alone.

After you've set up a system for adjusting variances, you can gaze at the meaningful variances that remain. Sometimes they will point out that the budget's initial assumptions were wrong. In this case, it may be worth revising the budget to clarify the direction for the remainder of the period. The entire analysis exercise is based on obtaining information that guides you to action. Accordingly, if assumptions are inaccurate, it's time to gather together the people forging then and set everyone on a new and realistic course of expectations. Leaving faulty assumptions in place dooms communication and planning.

Sometimes the variance will be due to unanticipated price increases. In particular, the budget may fail to predict the timing of an increase correctly, even if it's reasonably accurate as to the amount. I advise you to avoid constructing the pessimistic budgets that inherently allow you to proclaim the great news that you're operating under budget. These worst-case budgets provide a false sense of security, and don't answer any of the important operating questions with integrity.

Faced with price increases, you can take immediate action by altering vendors or specifications. In some publishing operations, it may be appropriate to respond to budget variances with hair-trigger speed. Often, a long-term solution is better, and in the course of finding it, you may allow yourself to veer off the budget momentarily. The point is to understand that decision and the conditions under which you're making it.

Although this entire discussion presumed that our response to increases in volume was at best elation and at worst indifference, we should note that the net dollars necessary for growth may alter that mood. For example, the manufacturing costs of an aggressive circulation promotion campaign may simply be too expensive to sustain. Therefore, your budget should reveal net variances alongside adjusted totals. Someone is still writing out a check for these lofty though justifiable amounts.

Better insights

Finally, the remaining adjusted variance may be revealing how skillful you are as a production manager. Were you clever enough to use split fountains, change paper stock right before the price increase, and select your impositions wisely? Tactics like those will tend to show negative numbers in the adjusted variance column, indicating that you are under budget in terms of purchasing skill, if not in whole dollars. And this kind of cost information may give you and everyone else in your organization a bit better insight into the contribution production managers can make to a magazine.

COPYRIGHT 1989 Copyright by Media Central Inc., A PRIMEDIA Company. All rights reserved.
COPYRIGHT 2004 Gale Group