The ‘Black Box’ of Cost Estimating

May 11, 2026

The late great Harry Rhode, his older (and some people say smarter) brother Elliot, and his brilliant son Jan, who recently retired from his consulting business, created a cost-estimating system over 50 years ago that is still used by most converters today. Cosmo DeNicola, the founder of Amtech Software, basically copied this system, and it is still the backbone of all cost estimating done at the company. The basic architecture of this system is that the direct costs of the order, plus an allocation of all other enterprise costs, plus a provision for profit, equals sales price. This is what we accountant types call full absorption costing, because every cost is allocated to every order and therefore every order must “absorb” its share of the company’s expenses. It is pure poetry, and if you get the expenses right, the planned level of activity right, and all of the equipment speeds and setup times correct, then you might really have something special.

Most of these full absorption systems are set up to calculate two things:

The contribution of the order—sales price less direct costs.
The estimated return on the sale—contribution less direct and allocated overhead.

Unfortunately the world is a messy place, especially when you are running a custom job shop where every order is nuanced in terms of size, complexity, print, quantities, the equipment that it runs on, the handwork that needs to be done to make a completed product, and whether you will be storing the product for your customer. Lots of variables to contend with and, therefore, lots of things that can go wrong. If you were running a paper mill or a cookie-baking operation with large batches running over the same equipment every day with well-established speed and capacity standards, then these systems would make very good sense. But in a custom job shop they can lead you to make poor decisions.

To be fair to the Rhode family, who contributed greatly to the converting business, when Harry and his team rolled out their ERP system, the American economy was still booming. Paper was starting to get scarce, new customers seemed to be popping up everywhere, and owning a converting operation was almost as good as owning a printing press to print dollar bills. Price competition was rare, and you really could go to market with a cost-plus system and charge what the system told you to charge. It was a true golden age for converters; machinery was getting faster and more accurate, real price competition was rare, and as long as you took care of your customers and paid your bills in a timely manner, there was good money to be made. The full absorption system of costing made sure that prices stayed high and life was good.

Of course, nothing lasts forever, and massive paper shortages, which facilitated the founding of AICC, the continued evolution of modern corrugators and modern converting equipment, and competition from foreign markets that severely impacted manufacturing in the United States changed the landscape dramatically. The more efficient producers and the integrated producers began flexing their muscles, and competition became a real issue. You could no longer go to market blindly following a cost-plus system and be successful. New customers were harder to find, and you needed to go to market with a combination of good pricing, high quality, and strong customer service. Converters began to see that not all orders were able to absorb as much overhead as their systems told them to, so they began pricing different orders at different predicted profit levels within their costing systems. The market began to set the price, and converters often had to compete with competitors who had faster equipment, lower overheads, and a lower acquisition cost for raw materials. The landscape changed dramatically, but the costing systems did not.

If the pure poetry of cost-plus doesn’t work, what is a converter to do? They can’t simply scrap their entire system, and creating a parallel offline system is cumbersome and requires great duplication of effort. Even if they were willing to do this, they aren’t sure what the new system should look like. The practical manifestation of this is that almost every converter has created their own pricing “alchemy” and has tweaked their systems to spit out prices that they think will work in the marketplace. With so few new customers that require packaging starting up, almost every order must be taken away from an incumbent producer based on the combination of price, quality, and service, and the existing prices are known.

Often, converters are hesitant to update their costing models, except for major changes in the cost of raw materials, labor, or other major cost components, because they have their systems tweaked in a way that they are comfortable with. Others lament the “irresponsible pricing” that they see from their competitors, as they don’t really understand the pricing that comes out of their own systems but can’t believe that anyone could possibly charge such low prices and still be profitable. Over time, the costing systems simply become a “black box” that no one really understands anymore, and pricing becomes a combination of guesswork and alchemy. At the end of the day, the market determines the price anyway, and the converter’s decision is generally whether to accept the business at the existing price or to try to upsell the customer on a combination of better quality, innovative design, or better service.

As many of you who know me or read my articles know, my solution to this is two-fold:

Simplify your systems by narrowing down your definition of contribution to consider only the cash costs of the order, and stop all of the allocations of costs that are fixed, regardless of whether you run that order. Disaggregation of costs and full absorption costing are causing you to run business that you shouldn’t and to not accept business that you should.
Find meaningful ways to interject time into the equation. Time is the ultimate equalizer in this conundrum, and I can tell you from my 35-plus years of following this industry that speed kills. How long an order ties up your equipment becomes the most important measurement in a successful manufacturing operation. If you were running a paper mill, you would pretty much know exactly how long it takes to make a batch of paper and how many orders you can run in a month. In a custom job shop, this information varies greatly from order to order and from day to day, so you need to improve your plant measurements and bring this element of time into your estimating.

Thankfully you are no longer limited by the information that your software vendor wants to give you, and there are new ways that you can utilize to move your data in the cloud and apply some really powerful analytical tools to it, some even powered by AI. This is the dawning of a new age of data management and analytics and probably time to retire the “black box” that is embedded in your existing ERP system. The good news is that you most likely don’t need to retire the system itself to improve your system of pricing and order decision-making, but you must take control of your data to better understand the implications of accepting or rejecting an order at a certain price point.