White.rca-Resource Consumption Accounting

RCA: Resource Consumption Accounting

Back to Basics in Management Accounting:

Resource Consumption Accounting

CAPT Larry R. White, CMA, CFM, CPA, CGFMU.S. Coast Guard


Traditional Cost Management


What is Management Accounting?

• Allocating Cost for Inventory Valuation?• Determining product or service cost for price setting?

Decision Support, Planning, & Control over the Value Creating Operations

forEnterprise Optimization


What is Enterprise Optimization?

• Maximum Revenue or Mission Outcome• Minimum Cost

Inputs Decisions Outcomes

Resources InformationProcessesCapabilityLeadership Approach

Enterprise Strategic Objectives


What is the source of costs in an organization?

• Products or Services• Overhead• Processes or Activities

Resources cause costs!


Characteristics of Resources?• Capabilities• Capacity• Cost Structure

Characteristics of Costs?• Fixed or Proportional (Variable)• Attributable to a Resource• Original Characteristic Change as they are used

by an organization’s processes.


Confusion About the Nature of Cost“Product costs are almost all variable costs….variable costs of manufacturing and marketing should provide a much better basis for managerial decisions….” (Kaplan & Cooper, p. 27, Management Accounting, April 1988).

“In most organizations, the only variable costs…are the material costs associated with the incremental order….For most service organizations, the variable costs…are even lower, perhaps close to zero.” (Kaplan & Cooper, p. 119, Cost & Effect, 1998).


Economic Decisions

• How often do you start a completely new operation?

• Don’t you usually use some of your existing resource capacity and capability?

• Most decisions are incremental – A little more or a little less– This places a premium on identifying costs

relevant to the decision – What resource consumption did the decision

change?


Break Even

• Adding Resources, adds Productive Capacity

• Break Even = Fixed CostsContribution Margin

• Break Even = Fixed CostsRevenue – Variable Costs

FC

CM

BEVolume

$


Traditional Cost Management“In the game of business …[accountants] aspired to be players, or at least umpires, but were relegated to the humble office of scorekeepers. Their revenge for this ignominy was to keep the score in such a way that neither the players nor the umpires could ascertain the state of the game.”

R.G.A. Boland. Quoted in the Financial Times June 14, 2003


Income Statement vs.Multiple Margin P&L

+Revenue-Cost of Goods Sold=Gross Margin-G&A-Depreciation-Interest= Net Income before Tax-Taxes=Net Income

+Revenue-Product Variable Cost= Contribution Margin-Product Fixed Cost= Gross Margin-Non-Product Variable Costs=Margin 3-Non-Product Fixed Cost=Margin 4-Business Sustaining Costs=Margin 5


Are Fixed and Variable Costs Important in Government?

• Does your activity generate revenue?– Direct application

• Are you subject to budget cuts? Fallout funding at the end of a fiscal year?– You had better know how to shape your

capacity and cost structure.• Are you subject to increases or decreases

in demand for your services?


What is Resource Consumption Accounting?


4 Stages of Cost Management & Performance Measurement Systems*

• Stage 1 - Inadequate for Financial reporting

• Stage 2 - Financial-reporting driven

• Stage 3 - Standalone (currently dominant stage of ABC)

• Stage 4 - Integrated cost management, financial reporting and performance measurement

We need to get to stage 4!!!

*Kaplan, R. S. & Cooper, R. (1997). Cost and Effect, Harvard Business School Press: Boston, MA.



• RCA inherits core principles from a German Cost Management Approach (GPK)

– GPK is a well developed Standard Costing System

– Principles applied in practice since the late 1940’s

– Principles implemented by 3,000+ companies

• RCA integrates– Activity-based Costing and Throughput

Concepts

• RCA creates an integrated economic model of operations for decision making– Enterprise Optimization

RCARCA

Resource view

Advantages

Process viewAdvantages

GPK ABC

Capacity Analysis and Management

Process Analysis and Management

Capacity-Focused

Activity-Focused


RCA: The Fundamental DifferenceOperational Integration

• Breaking the “Tapestry Syndrome”• Stop trying to get management accounting information

from the financial accounting general ledger



Principle 1: Focus on resources & their consumption• Understand your resources & their consumption, understand cost• Provides a framework for capacity management

Principle 2: Quantity structure for resource consumption• Operations drive costs• Model the operation & use of resources, then apply cost• Enables resource capacity management

Principle 3: Recognizing the inherent and changing nature of costs• Resource pools start with an inherent cost structure• As Resources are consumed, the nature of their costs change• Costs that are initially proportional by nature can change from

proportional to fixed based on consumption patterns


Product Support Cost

S: Ancillary Production Equipment

S: AdministrationHuman

Resources & Accounting

S: Quality Assurance

RP: Dryer (Hours)Capacity: 100Output Qty: 100

S: Plant Engineering and

Maintenance

RP: PlantMaintenance (Maint. Labor)Capacity: 30,000Output Qty: 30,000

RP: Admin Labor(Labor hours)Capacity: 17,000Output Qty: 17,000

Perform HR

RP: QA Labor(Labor hours)Capacity: 14,000Output Qty: 14,000

P: Extrusion Line

RP: Extrusion Labor (Labor hours)Capacity; 32,000Output Qty: 30,000

Product P & L’s

Budgeted Products

Department

Resource PoolAbbreviated RP

Activity

RP: Chiller (Hours)Capacity: 50,000Output Qty: 50,000

Perform

Accounting

Perform Admin

QATesting

Legend

S-Support

P- Production

Common Fixed Costs

ProductReturns

RP: Extrusion Machine1(Machine hours)Capacity; 17,520Output Qty: 10,000

Manufacturing Costs

RCA Storyboard


Plant Maintenance Resource Pool Output Measure: Maintenance Labor HourOutput Quantity: 20,000 Hours

Primary Costs Fixed Proportional

Technician Wages -$ 600,000$

Supervisor Salary 48,000$ -$

General Material 855$ 100,000$

Depreciation: Shop Equipment 50,000$ -$

98,855$ 700,000$

Secondary Costs

Resource Pool Output Fixed Qty Prop Qty

Utilities MW-Hrs 40 160 6,000$ 24,000$

Activity/Process Driver Fixed Qty Prop Qty

HR: Benefits Adjustments # Adjusts 20 0 1,000$ -$ Purchase: Gen Materials # PO's 10 200 200$ 4,000$

7,200$ 28,000$

Total Resource Pool Costs 106,055$ 728,000$

Unit Cost Rates (/20,000 Hrs) 5.30 36.40


For Enterprise Optimization RCA provides

• Operational view of organization• Fixed and variable nature of cost

• Costs are better understood, • Responsibility for costs is clearer

• Variance analysis• Target cost determination• Multi-level and multi-dimensional contribution

margin / profitability reporting• Capacity utilization information• Forecasting and simulation


Case Studies• Manufacturer of specialty films, extrusion coatings, and laminations

– Part of a $800 mil conglomerate– Operations in North & South America, Germany and Eastern Europe– Examined plant produces 200 products in 60 product families

• Outpatient Surgery Center– Part of a larger regional hospital with medical centers in several locations– Distinguished Hospital for Clinical Excellence, top 5% hospital for quality of care,

patient safety– Among an elite group of only 14 teaching hospitals in the nation

• Global semi-conductor business– Low-tech, hi-tech company– +/- 25 Billion low tech chips per year– Operations in North America, Asia and Europe

• Medical Sciences University– $1 Billion budget, 9000 employees– 2,500 students in Education, Patient Care, Research and Outreach– Funded by payments for clinical services, grants and contracts, philanthropy,

tuitions and fees


Benefits of RCA• More accurate cost assignment through properly attributing

costs to specific processes and/or outputs based on causality

• Product costs assigned include only the cost of resources used• Eliminates costs previously assigned based on unrelated changes to

other products• A better understanding of resource consumption patterns

and relevant costs• Capacity analysis is facilitated.

• The amount of excess/idle capacity is made available to managers based on unconsumed capacity

• The planning cycle is simplified by using RCA reverse flows to model relationships

• Managers can easily use the underlying information to support incremental decision making given cost rollup at various levels

• Proper recognition of the nature of consumption and cost behavior improves decisions


RCA Integration Diagram

RCARCA

Resource viewAdvantages

Process viewAdvantages

GPK ABC

Capacity Analysis and Management

Process Analysis and Management

Capacity-Focused Activity-Focused


RCA: What’s Next?

• Bibliography of RCA Publications• CAM-I.org, RCAInfo.com, www.IMAnet.org• Resource Consumption Accounting Institute

– Training with a major university– Certification for RCA Practice & Software– Support for RCA Adopters

• Implementation Reviews• Reviews of organizational practice & use

Documents

White.rca-Resource Consumption Accounting