RCA Discussion:
The Concept of Avoidability
& The Blended Cost Concept Error
Larry R. White, CMA, CFM, CPA, CGFM
Executive Director
Resource Consumption Accounting Institute
1
Resource Consumption Accounting
• RCA Inherits Core Principles from German
Cost Management (GPK)
– GPK is a Well Developed Standard Costing
System
– Principles Applied in Practice since the Late
1940’s
– Implemented by 3,000+ Companies
• RCA Creates an Integrated Economic
Model of Operations for Decision Making
– Enterprise Optimization
– Principle Based
– Superior Marginal Analytics
Capacity
Analysis and
Management
Process
Analysis and
Management
RCA
Resource
view
Advantages
GPK
CapacityFocused
Process view
Advantages
ABC
ActivityFocused
2
Managerial Costing Conceptual Framework
3
IMA Managerial Costing Conceptual Framework Task Force
Modeling Concepts
Modeling Concepts
Qualitative Characteristics
4
IMA Managerial Costing Conceptual Framework Task Force
Information Use Concepts
Information Use Concepts
Qualitative Characteristics
5
IMA Managerial Costing Conceptual Framework Task Force
Avoidability
• A characteristic of an input that allows for the input
(and hence its costs) to be eliminated as a result
of a decision.
• Key Points:
– Characteristic of a Resource, not a cost
– Result of a Decision
– What about time – short term, long term?
• Another Concept - Divisibility: A characteristic of a
resource that allows it to be associated in its entirety with
the change in a managerial objective’s output resulting
from a decision.
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Cost Concepts
Operational
Fixed
Decision Support
Variable
Avoidable
Unavoidable
“Relevant Range”
Which Cost Concept Must Form the Basis for Cost Modeling?
Can be Modeled
Basis for Action
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Blended Cost Concept Error
• BCCE Defined:
• Fixed Costs are NOT the same as Unavoidable Costs
Fixed ≠ Unavoidable
• Variable Costs are NOT the same as Avoidable Costs
Variable ≠Avoidable
4/13/2015 7:06 AM
© RCA Institute 2010
8
Example #1 – Cost Concepts
• A manufacturing company decides to replace an old
extrusion plant with modern equipment. This results in a
significant reduction in the amount of maintenance
required. The maintenance manager realizes that he can
reduce his total maintenance capacity by 8,000 hours, the
equivalent of a whole crew including the crew's supervisor.
• What are the respective operational and decision cost
concepts for each of technician wages and supervisor
salary in Example 1?
4/13/2015 7:06 AM
© RCA Institute 2010
9
Example #1 – Cost Concepts
• Operational Cost Concepts:
– The operational cost characteristics of technician wages
is a variable cost
– The operational cost characteristics of supervisor salary
is a fixed cost
• Decision Cost Concepts:
– Both technician wages and supervisor salary are
avoidable cost
• In this case, operationally fixed and variable costs
are avoidable
4/13/2015 7:06 AM
© RCA Institute 2010
10
Example #2 – Cost Concepts
• The same company receives an offer from an outside
vendor to take over the repair of extrusion rollers. The
manager knows from his MA system that the company
spends 2,400 hours per year on these activities. A
maintenance technician works 1,600 productive hours per
year.
• What are the respective operational and decision cost
concepts for each of technician wages and supervisor
salary in Example 2?
4/13/2015 7:06 AM
© RCA Institute 2010
11
Example #2 – Cost Concepts
• Operational Cost Concepts:
– The operational cost characteristics are the same as for
Example 1
• Decision Cost Concepts:
– The wages of one technician are avoidable
– The costs associated with the remaining 800 hours
(2,400 - 1,600) are unavoidable costs
– The crew supervisor will be less busy but his salary is
similarly unavoidable
• In this case, operationally fixed and variable costs
are now unavoidable cost.
4/13/2015 7:06 AM
© RCA Institute 2010
12
Blended Cost Concept Error
 BBCE Is Committed By Using Operational
Cost Concepts (i.e., Fixed & Variable) In
Decision Support Analysis
 This Error Can Have One Of Two Effects
– It Overstates The Benefit Of A Decision When
Some Variable Costs Are Unavoidable
– It Understates The Benefit Of A Decision When
Some Fixed Costs Are Avoidable
4/13/2015 7:06 AM
© RCA Institute 2010
13
Resource Consumption Accounting
• RCA Focuses on Modeling Resources
– So their characteristics are in the forefront
• Dollars are imminently divisible
• RCA Models Fixed and Proportional Consumption
– From Resource Center to Resource Centers,
intermediate Managerial Objectives, and final
Managerial Objectives.
• RCA also models the changing nature of consumption as it
moves through a value chain (discussion for another day)
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www.RCAInstitute.org
lwhite@rcainstitute.org
757 288 6082
15
RCA Storyboard
S: Ancillary
Production
Equipment
RP: Dryer
(Hours)
Capacity: 100
Output Qty: 100
S: Plant
Engineering and
Maintenance
RP: Chiller
(Hours)
Capacity: 50,000
Output Qty: 50,000
RP: Plant Maintenance
(Maint. Labor)
Capacity: 30,000
Output Qty: 30,000
S: Administration
Human Resources
& Accounting
Perfor
m
RP: Admin Labor
(Labor hours)
Capacity: 17,000
Output Qty: 17,000
HR
Legend
Perfor
m
S-Support
Accou
nting
P- Production
Perfor
m
P: Extrusion Line
Department
S: Quality
Assurance
Admin
Resource Pool
Abbreviated RP
RP: Extrusion Labor
(Labor hours)
Capacity; 32,000
Output Qty: 30,000
RP: Extrusion Machine1
(Machine hours)
Capacity; 17,520
Output Qty: 10,000
RP: QA Labor
(Labor hours)
Capacity: 14,000
Output Qty: 14,000
QA
Testin
g
Activ
ity
Produ
ct
Retur
ns
Manufacturing Costs
Product Support Cost
Budgeted Products
Product P & L’s
Common Fixed Costs
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RCA Information
Plant Maintenance Resource Pool
Output Measure: Maintenance Labor Hour
Output Quantity: 20,000 Hours
Primary Costs
Fixed
Proportional
Technician Wages
$
-
$
600,000
Supervisor Salary
$
80,000
$
General Material
$
12,000
$
Depreciation: Shop Equipment
$
50,000
$
$
142,000
$
700,000
$
6,000
$
24,000
$
$
1,100
500
$
$
10,000
$
7,600
$
34,000
$
149,600
$
734,000
100,000
-
Secondary Costs
Resource Pool
Output
Utilities
MW-Hrs
Activity/Process
Driver
HR: Benefits Adjustments
Purchase: Gen Materials
# Adjusts
# PO's
Fixed Qty Prop Qty
40
160
Fixed Qty Prop Qty
22
10
0
200
Total Resource Pool Costs
Unit Cost Rates (/20,000 Hrs)
7.48
36.70
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