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CASE VLGMS‐0605‐C

TIME‐DRIVEN ACTIVITY BASED COSTING

AT CORELIO PRINTING

Prof. Dr. Filip Roodhooft

An‐Katrien de Vlieger
Luc Joren

Background Corelio Printing

Corelio Printing is the printing division of Corelio, a large Belgian multimedia news business. Printing
is one of Corelio’s core activities. Other core activities of Corelio involve the publishing of
newspapers (De Standaard, Het Volk, Het Nieuwsblad, Vers l’Avenir, …) and freesheets (Passe‐
Partout).

Corelio Printing operates three printing works in Belgium dedicated to particular activities: heatset,
coldset and sheet‐fed (see exhibit 1).
 The heatset works in Erpe‐Mere is specialized in printing periodicals such as magazines,
catalogues, comics, brochures and related publications. In 2004, Erpe‐Mere commissioned a new
48‐page press. This investment resulted not only in a substantial increase in capacity, but also in
a larger number of revolutions on the printing presses.
 The coldset works in Groot‐Bijgaarden prints 50.000 tons of newspaper per annum.
Approximately half of this is used to print own newspapers. The other half is used to produce
newspapers and freesheets for external clients.
 Sheet‐fed, based in Vorst, is focused lower quantities. The modern printing works provides a full
service for all graphical products: from creative design to flawless technical production and high‐
quality printing, even including distribution.

Current costing system

 This case was prepared by Prof. Dr. Filip Roodhooft and Ms. An‐Katrien de Vlieger as the basis for class discussion
rather than to illustrate either effective or ineffective handling of a business situation. This case was made possible
through the cooperation of Corelio Printing and Luc Joren. The numbers used in this case are hypothetical.
 Copyright © 2006 by Vlerick Business School, Belgium. Not to be used or reproduced without written permission
directly from Vlerick Business School.
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CASE VLGMS‐0605‐C

The strategy of Corelio Printing was well put by Jan Lynen, director of the printing division:

“Printing is one of Corelio’s core activities. As such, Corelio Printing has to become an
organization that acts as a reliable and stable partner by supplying high‐quality printed
matter at competitive prices and with the shortest possible turnaround times.”

This strategy opted for the highest possible customer service, combined with profitability and prices
in accordance to the market. Though the graphical market was typified by over‐capacity (and
consequently declining margins), the Corelio Printing had a structural under‐capacity. As this division
is thus confronted with on the one hand pressure to invest more in quality and service and on the
other hand a market characterized by overcapacity and declining margins, accurate cost
management was crucial.

Keeping this strategy and market situation in mind, Luc Joren, controller of Corelio Printing, was a bit
concerned about the current costing system. The current costing system consisted of a pre‐ and
post‐calculation. During the pre‐calculation, the direct costs (paper, ink, labor, …) were directly
allocated to the printing orders, and the indirect costs (warehouse, maintenance, …) were allocated
based on machine‐hours. Based on these full‐cost calculations, an offer was submitted to the
customer. During invoicing, the post‐calculation was drawn up. The post‐calculation was set up by
collecting the different direct costs of the printing order from the ERP‐system, and by multiplying
these costs with the standard rates for indirect costs. Equipped with the both the pre‐ and post‐
calculation, it was the job of Luc Joren to compare these calculations and analyze the variations, in
order to give financial support to the management.

This current costing system was very accurate as to the direct costs, but far from ideal to allocate the
overhead costs:
 Over‐ and under‐capacity were not revealed;
 The cost of non‐planned stoppages was unknown;
 Though significant as to the strategy of Corelio Printing, non‐productive overhead was allocated
extremely simple and inaccurate based on machine‐hours.

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CASE VLGMS‐0605‐C

Time‐Driven ABC

Fortunately, on a bright Sunday afternoon, Luc Joren read the Kaplan and Anderson (2004) article
about a new astonishing method to manage costs effectively: Time‐Driven Activity Based Costing.
While reading this article, Luc Joren became more and more convinced of the added value Time‐
Driven ABC could bring to Corelio Printing. In order to convince the management of Corelio to
change the costing system of the printingl division dramatically, Luc Joren decided to test this new
costing system.

Time‐Driven ABC analysis

Luc Joren decided to apply Time‐Driven ABC to the Heatset works (Erpe‐Mere), as this business unit
was growing the most. More precisely, he decided to concentrate his test on the newest, most
flexible and most important press of the business unit: the Lithoman IV 48 pages press. As this was
just a test, he choose to apply Time‐Driven ABC only to the month March.

The Lithoman IV 48 pages press is one of the three rotation presses (a 16 pages press, a 32 pages
press and a 48 pages press) of the Heatset Works. A 16 pages press can press and fold per rotation
of the cylinder a quire1 of 16 A4 pages at once. A 48 pages press can press and fold quires of 48
pages. In order to see the relative importance of the 48 pages press, exhibit 2 gives an overview of
the 3 presses and their capacity. The table clearly states that the Lithoman IV 48pg is accountable for
more than half of the printing capacity of the Heatset Works. It works fast and uses the newest
printing technologies.

Luc Joren’s aim was to get to know the costs per quire, per order, per customer and per machine of
the Heatset Works for March 2005. The yearly costs attributable to the 48 pages press for 2005 (see
exhibit 3) consisted of energy costs, labor costs (permanent and interim positions), fixed costs
(depreciation, insurance, taxes, …) and maintenance costs (internal and external).

The Lithoman 48pg has a practical capacity of 4,5 FTEs, meaning that it takes 4,5 FTEs on average to
control and steer the machine. However, capacity is measured by using machine hours. Production
takes place 24 hours a day (in 3 shifts of 8 hours), except on Monday when there are only 2 shifts
available. A working week counts 5 days and there are 52 weeks a year. There is no production
during holidays. In 2005 there were 8 legal holidays, of which 4 on Mondays. Every week, it takes 15
minutes to start up the press on Monday morning and 15 minutes to shut down the press on Friday
evening. On average (historically checked), the press

1
A quire is a booklet of a certain number of pages. A finished printing order consists of one or more quires that are printed
separately.

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CASE VLGMS‐0605‐C

lies idle for about 15% of the total time due to paper‐ruptures, technical problems, preventative
maintenance, …

After a lot of discussions with the production staff, Luc Joren subdivided the proceedings of the 48
pages press into 7 more or less successive steps.

 Adaptation of the machine to the new quire (45 – 30 – 15 – 10 min): Before starting to print, the
machine has to be adapted to the new order. This includes putting paper in the machine,
programming the fold outline and putting the correct printing plates on the press. There are 4
different types of adaptation, depending on the characteristics of the previous order:
o Large adaptation (45 min): other fold outline and other paper
o Normal adaptation (30 min): in between a large and small adaptation (mostly for new
quires)
o Small adaptation (15 min): equal fold outline and equal paper (mostly for existing
quires)
o Black adaptation (10 min): only replacing black/white printing plates

 Start‐up phase (12 min): Before the printing order can be executed effectively, quality has to be
checked. This start‐up phase has to be as short as possible. If everything goes well, this start‐up
phase takes 12 minutes per quire. However, if the person responsible for checking the quality of
the printed items is inexperienced, it takes 8 minutes extra. The average 12 minutes holds for 4‐
color printing. If only black‐white printing is required, the start‐up phase diminishes with 4
minutes. As the Heatset Works feels very strongly about quality, this start‐up phase is taken very
seriously and quality levels are really high. However, if clients are really extremely demanding,
the start‐up phase may increase with 30 minutes. Normal paper weight goes from 45 gr to 90 gr.
For weights exceeding this range, a supplementary 4,5 minutes are counted. Finally, the
duration of the start‐up phase is also dependent on the type of adaptation of the machine. If a
new type of paper or a different kind of folding is used, more problems may raise concerning
quality. Consequently, for black and small adaptations, there are no extra minutes necessary.
However, for normal and large adaptations, the start‐up phase respectively increases with 10,5
minutes and 18 minutes.

 Printing permission (10 min): Depending on the customer’s wishes, the customer has the
opportunity to give his printing permission for a quire. When he chooses to do so, he controls
visually the printed preview, and gives his permission to proceed or not. In normal conditions,
this process takes 10 minutes. However, for highly demanding customers, this process takes 15
minutes as they want to check every detail carefully. In addition, if the order belongs to a new
customer, an extra 4 minutes are necessary in general. New
customers are likely to spend more time checking the printed preview, as the quality process is
new for them.

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CASE VLGMS‐0605‐C

 Printing & Folding: The actual printing and folding time of a quire, depends to a large extent on
the speed of the press. However, this speed is not identical for all types of orders. It is subject to
some parameters. The theoretical maximum velocity of the 48 pages press is 45.000 rotations
per hour. This can be negatively influenced by the fold outline of the quire, the paper quality
(newspaper‐paper causes for example a decline of velocity), the ink occupation (a higher ink
occupation results in a velocity decline) and the number of copies requested (if the number of
copies is smaller than 40.000 quires, the velocity declines as the maximum rotation speed is
often not reached in order to reduce the stopping time). The matrix with the different rotations
per hour is given in exhibit 4.

 Changes between times: Occasionally, the customer wants to change certain things during the
actual printing. This implies a standstill of the press and a change of printing plates (black
adaptation). If there are however pictures that have to be changed, a small adaptation is
needed. If the number of changes is large (higher than 5), an extra 4 minutes are appropriate.
After adapting the quire to the changes between times, there is of course again a start‐up phase.
This additional start‐up phase takes 5 minutes in general, thus not the regular 12 minutes, as
there was already an initial start‐up phase. A new printing permission after these changes is not
required.

 Preventative maintenance (30 min): During printing and folding, preventative maintenance is
carried out.

 Other activities between times (20 min): When the press is well running, the personnel of the
press can prepare paper rolls, review printing previews, update PC‐programmes, register hours,
…

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CASE VLGMS‐0605‐C

When looking at the incoming orders for March 2005, Luc Joren saw that there were 3 large orders
placed by 2 customers:

 Customer A, an international marketing office and one of the Heatsets most important
customers commanded a new gigantic order (order X1). This order was a full color glossy
magazine that would be distributed internationally by the customer. It consisted of 2 quires with
each a volume of 2.000.000 copies. When scheduling this order, the planner decided that this
order would be the first order for March 2005. In addition, the planner also noticed that order X1
would have the same fold outline (2*24 pg A4) and the same paper (80 gr) as the previous order
scheduled. As this order was relatively large and as the customer demanded a high quality level,
the planning department decided to put an experienced printer in charge. The printer would also
show a preview of both quires to the customer before printing them. Changes during printing
were not likely to occur, as this order was already reread multiple times by the customer and its
copywriters.

 Customer B, a large international retailer and also a relatively significant customer of the Heatset
Works, placed 2 orders to be printed in March. The first order (order X2) consisted of 1 quire,
with a volume of 3.500.000 newspaper‐like black/white copies. Because of the urgency of this
order, the planner planned this order right after order X1. This implied however a big cost, as the
paper type (40 gr) and the fold outline of order X1 was totally different in comparison to the
paper type and fold outline of order X2 (2*36 pg delta). In addition, the normal printer had two
weeks off during the planned printing period for order X2, so an apprentice would have to do the
job. Fortunately, customer B is quite easily satisfied. And as customer B has been already a
customer for several years now, he does not want to give his printing permission anymore. He
trusts the quality of the Heatset Works. Still, during printing, after 500.000 copies, the customer
realized that some numbers in the quire are not correct. As these few numbers were considered
to be extremely important for the customer, the customer asked the printer to stop printing for
a while, and change the numbers (4). These changes were the only changes required by the
customer during printing.
The second order (order X3) placed by customer B, planned directly after its first order for
March, consisted of 1 quire of 900.000 4‐color pieces. The order required a normal paper type of
70 gr and a fold outline of 2*12 pg A3. Also for this second order, a printing permission was not
asked by the customer. However, also here, the customer realized during printing that there
were still some mistakes in the text. After 50.000 pieces, 2 pictures and some sentences needed
to be changed. Unfortunately, after 120.000 pieces, the customer realized that there was still a
mistake in the text. This time, only a 1 picture needed to be changed.

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In addition, customer B placed a very small order (order X4) at the end of March, which also – by all
means – had to be printed in March. The order comprised 5.500 copies in full‐color, on heavy weight
paper of minor quality. The requested fold outline was 48 pg A4. Due to the lateness of the order,
and due to the special paper requirements, a large adaptation of the Lithoman was necessary.

Besides these orders from customer A and customer B, the Heatset Works received several smaller
orders to be printed in March on the Lithoman 48pg press. Luc Joren asked an assistant to look at
these orders, and the assistant found – taking into account the time equations set up by Luc Joren –
that these smaller orders of March (of customers other than A and B) accounted for 75,25 hours.

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CASE VLGMS‐0605‐C

Exhibit 1 – Structure Corelio

Corelio
8

Corelio Innovation and

Flemish newspapers Walloon newspapers Free regional press Woestijnvis
Printing Participation

BU HEATSET BU COLDSET BU SHEET-FED

(Erpe-Mere) (Groot-Bijgaarden) (Vorst)

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CASE VLGMS‐0605‐C

Exhibit 2 – Capacity presses Heatset Works

Million rotations 32 pages % of total capacity Heatset

MAN Rotoman 16pg 66 20%
MAN Lithoman 32pg 80 25%
MAN Lithoman IV 48pg 182 55%
TOTAL 328 100%

In order to be able to compare the capacity of the different presses, the capacity of the presses is
expressed per million rotations (equivalent to 32 pages) per year.

Exhibit 3 – Costs attributable to Lithoman IV 48pg in 2005

Energy € 500.000 16%

Labor € 750.000 24%
Fixed costs € 1.125.000 36%
Maintenance € 725.000 24%
TOTAL € 3.100.000 100%

Exhibit 4 – Matrix printing & folding

Fold outline Maximum Minor paper High ink Number of copies

rotation speed quality occupation < 40.000
48 pg A4 45.000 ‐5.000 ‐5.000 ‐5.000
2 x 24 pg A4 40.000 ‐2.000 ‐2.000 ‐2.000
1 x 24 pg A3 40.000 ‐2.500 ‐2.000 ‐1.500
2 x 12 pg A3 30.000 ‐1.500 ‐1.000 ‐1.000
2 x 36 pg delta 28.000 ‐1.000 ‐500 ‐500