Resource Consumption Accounting:
Manager Focused Management Accounting
Larry R. White, CMA, CFM, CPA, CGFM
Executive Director,
Resource Consumption Accounting Institute
National Chairman of the IMA Board, 2004-2005
1
Agenda
• Resource Consumption Accounting I: Manager
Focused Managerial Costing
– Introduction to RCA
– Management Accounting with a Manager Focus
– Principles and Concepts for a Manager Focus
• Resource Consumption Accounting II: Modeling
and Applications
– Overview of RCA Modeling
– Applications & Case Results
– Options for supporting technology
2
Enterprise Financial Management
Tax
Accounting
Financial
Accounting
Source data
capture
(transactions)
Managerial
Accounting
Non-financial
data capture
Cost Measurement
Cost Accounting
External financial Reporting
e.g. GAAP, IFRS
Performance Evaluation
& Analysis
For example:
• Assessment of current strategy
& plans
• Integrated cost/operational
performance measures (e.g. cost
variance, capacity measurement,
process efficiency etc)
• Profitability reporting
• Process analysis
• Learning & corrective actions
•Costs of goods sold
•Inventory valuation
The Domain of Costing
Historical
Lower
Value-added to managerial decisions
Planning & Decision
Support
For example:
• Fully absorbed and incremental costing
• Adaptive operation & cost based
planning, budgeting & forecasting
• What-if analysis & planning
• Product, process, channel, & customer
strategic adaptations
• Enterprise optimization (e.g. make vs.
buy, outsource etc)
Predictive
Higher
RCA Recognition
Activity Based
Costing
Traditional Standard
Costing
4
Resource Consumption Accounting
• RCA Inherits Core Principles from German
Cost Management (GPK)
– Well Developed Standard Costing System
– Practiced since the Late 1940’s
– Principles used in 3,000+ Companies
Capacity
Analysis and
Management
Process
Analysis and
Management
RCA
• RCA Integrates
– Activity-based Costing and Throughput Concepts
• RCA Creates an Integrated Economic
Model of Operations for Decision Making
–
–
–
–
Enterprise Optimization
Internal Manager focused
Principle Based
Superior Marginal Analytics
Resource
view
Advantages
GPK
CapacityFocused
Process view
Advantages
ABC
ActivityFocused
5
• Resource Consumption Accounting I: Manager
Focused Managerial Costing
– Introduction to RCA
– Management Accounting with a Manager Focus
– Principles and Concepts for a Manager Focus
6
What is Enterprise Optimization?
• To Maximize Revenue or Mission Outcomes
• To Minimize Cost or Redeploy Resources
Decisions On:
• Use of Existing Resources and Capabilities
• Incremental Changes to existing Resources
• Major Changes to existing Resources
7
What is Management Accounting’s
Contribution to Enterprise Optimization?
• Decision Support, Planning and Control
Over the Value Creating Operations of the
Firm
By doing what?
• Modeling… the Organization’s Operations
& Costs
8
What Causes Costs?
Resources (also creates any revenues!)
Resource
Pool
Proportional
OUTPUT
Fixed
Organizational Element
(Support or
Production)
Material/Commodity
Labor
Equipment
Operating Budget
Another
Resource
Pool (s)
Or Final
Product/Service
Material
Services
(Reflecting
Resources
Applied)
Resource Quantities Drive Monetary Quantities
9
More Realistic Resource Flows
Resource Pool A
Resource Pool E
Resource Pool B
Final Output 1
Final Output 2
Resource Pool F
Final Output 3
Resource Pool C
Resource Pool G
Final Output 4
Resource Pool D
Resource Pool H
10
What Are the Primary Characteristics of
Resources?
• Capability
– Quality or Qualitative Characteristics
• Capacity
– Quantity They Provide
• Consumption/Cost
– Consumption/Cost Structure
– Consumption/Cost Behavior
11
How Do We Define Capacity?
• Productive
• Non-Productive
• Idle/Excess
Questions:
• Who is Responsible for Idle & Excess Capacity?
• What can Allocations of Idle & Excess Capacity
Do to Costs?
12
Cost Concepts
Operational
Decision Support
Opportunity Cost
Fixed
Variable
Avoidable
Unavoidable
“Relevant Range”
Which Cost Concept Must Form the Basis for Cost Modeling?
Can be Modeled
Basis for Action
Divisibility of Resource Information
13
What Constitutes an Effective
Model of Operations & Costs?
14
IMA Managerial Costing Conceptual Framework Task Force
• Resource Consumption Accounting I: Manager
Focused Managerial Costing
– Introduction to RCA
– Management Accounting with a Manager Focus
– Principles and Concepts for a Manager Focus
15
What Constitutes an Effective
Model of Operations & Costs?
16
What Constitutes an Effective
Model of Operations & Costs?
17
Principle: Causality
 Optimization Thinking:
 For a Given Outcome Understand the Cause
 For A Decision Alternative Understand the Effect
Cost must reflect the resource flows or consumption to be logical
and useful for decision making and control.
18
Causal Relationships
• Strong Form - Consumption relationship
can be quantified
• Weak Form – Consumption relationship
exists, but cannot be quantified
– Examples: Excess Capacity, CEO & personal
staff, Public Relations
• Attributable Cost – Costs of an output that
could be eliminated if that output were
discontinued and resources were reduced
accordingly.
19
RCA Structure
Structure
RCA
for Marginal Costing
Quantitative
Definition of
Material Causal
Relationships
Support/Secondary
Resource Pools
Support/Secondary
Activities
Primary Resource
Pools
Weak
Causal
Relationship
Primary Activities
Product/Service
Objects
Result Segments
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Concept:
Responsiveness
Insights into the Nature of Cost & Consumption
Proportional
Inputs
Inputs
&
their
$’s
Fixed
Inputs
An Output
Proportional
Inputs
Inputs
&
their
$’s
Product
A
Inputs
&
their
$’s
Proportional
Inputs
Fixed
Inputs
An Output
Product B
An Output
Service 2
Service 1
Inputs
&
their
$’s
Fixed
Inputs
Proportional
Inputs
Fixed
Inputs
An Output
Service 3
Inputs
&
their
$’s
Proportional
Inputs
Fixed
Inputs
An Output
Variability
Product A
Responsiveness
Product B
Inputs
Inputs
Product B
Product A
Output
Service 1
Service 2
Output
Service 3
$’s
Change in Total $’s
Due to a Change in
Total Volume
Service 2
Service 1
Variable
Cost
Inputs
Inputs
Service 3
Inputs
Fixed
Cost
Output
Output
Output
Total Volume
Traditional Principle of Variability:
Total Cost to Total Volume
Responsiveness
22
Examples of RCA Multi-Level P&L
Examples of RCA Multi-Level P&L
Examples of RCA Multi-Level P&L
Costing Continuum/Levels of Maturity
Predictive: Demand Planning Driven with
Capacity Sensitivity
Descriptive: Expense Tracking, Cost Reporting and Consumption Rates
Bookkeeping
1
Blind
No
marginal
insights
No
Marginal
Insight
Process/
lean
accounting
2
Process
Visibility
Limited
process
marginal
insights
Direct
cost to
outputs
3
Add
indirect
costs
4
Output
Visibility
Output
Visibility
Direct cost
marginal
insights
All output
cost
marginal
insights
Individual
std costs,
project &
job
costing
5
Explicit
Outputs
Output
specific
marginal
insights
Push
activitybased
costing
(ABC),
Product
costs
6
Explicit
Indirect
Costs
Explicit
output
marginal
insights
Level 6
with
customer
& channel
profitability
reporting;
Cost-toserve
7
Customer
Demand
Sensitive
Add
customer
& channel
marginal
insights
Marginal Insight Awareness
Unused
capacity
costs
(estimated)
8
(ABRP);
forecast
driver
quantities
X std unit
rates,
driverbased
budgeting
9
Unused Pull ABC
Capacity Resource
Aware
Planning
Common
fixed costs
begin to be
isolated
Increased
ability to
isolate
common
fixed costs
(TDABC);
forecast
driver
quantities
X std unit
rates;
direct cost
focus;
repetitive
work
conditions
10
Timedriven
ABC
Increased
ability to
isolate
common
fixed costs
Attributable
costs on all
objects,
blends
activity and
direct
resource
charges,
consumes
activities
back to
resources
11
R
C
A
Explicit
resource
cost object,
supplybased
denominator, strong
& weak
forms of
causality
catered for
Finite
systems
modeling
12
Simulation
No change
Detailed
26
Marginal Insights
Concept: Work
Insights into Process Effectiveness
Without the Work Principle:
Product 123
Inputs:
Resource Pool A
Planned Output: 1,000 Hrs
Actual Output: 1,100 Hrs
Pool A
1,100 Hrs
Using the Work Principle:
Resource Pool A
Planned Output: 1,000 Hrs
Actual Output: 1,100 Hrs
Setups
Product 123
Inputs:
Setups (Qty 10) 300 Hrs
Run Machine 800 Hrs
Run Machine
27
Integrated Data Orientation
Traditional Practice
Integrated
Data
Value
Chain Integration
Source Document: Goods Receipt
Source Document: Goods Receipt
Source
Goods Receipt
Raw Material
xxx kgs
Qty Document:
For Raw Material A123
Source
Goods Receipt
Raw Material
xxx kgs
Qty Document:
For Raw Material A123
xx.xx
Item$’s Raw Material
Qty $Amount
xx.xx
Item$’s Raw Material
Qty $Amount
Material A123 xx kgs $yy.yy
Material A123 xx kgs $yy.yy
Quantity Flows
Quantity Flows
Value Flows
Value Flows
28
For Enterprise Optimization
RCA Provides:
• Operational View of Organization
• Fixed and Proportional Nature of Cost
- Costs are Better Understood,
- Responsibility for Costs is Clearer
• Multi-level and Multi-dimensional Contribution Margin /
Profitability Reporting
• Capacity Utilization Information
• Planning, Forecasting, and Simulation
- Model is Reversible/Invertible for Calculations
29
Resource Consumption Accounting:
Modeling and Applications
Larry R. White, CMA, CFM, CPA, CGFM
Executive Director,
Resource Consumption Accounting Institute
National Chairman of the IMA Board, 2004-2005
30
• Resource Consumption Accounting II: Modeling
and Applications
– Overview of RCA Modeling
– Applications & Results
– Options for supporting technology
31
Operational & Financial Alignment
Operational View
Financial View
Resource/Resource Pools
Intermediate Outputs
Processes/Value Streams
Products/Services
Real Time
Action Oriented
Internally Focused
FR Time
Report Oriented
Externally Focused
RCA Modeling
Traditional Standard
Costing
Indirect 1
Indirect 2
Direct
Product
P&L
33
RCA Modeling
Indirect 1
Standard Costing
Indirect 1
Activity Based
Costing
Indirect 2
Indirect 2
Direct
Product
P&L
Direct
Activity 1
Activity 2
Product
P&L
34
RCA Modeling
RCA
Standard Costing
ABC
Indirect 1
Indirect 1
Indirect 1
Indirect 2
Indirect 2
Indirect 2
Direct
Product
Direct
Direct
Activity 1
Non-causal
Costs
Activity 1
Activity 2
Product
Product
P&L
P&L
P&L
35
RCA Storyboard
RCA Storyboard
RCA Storyboard
S: Ancillary
Production
Equipment
S: Plant
Engineering and
Maintenance
S: Administration
Human Resources
& Accounting
Perform
HR
RP: Dryer
(Hours)
Capacity: 100
Output Qty: 100
RP: Chiller
(Hours)
Capacity: 50,000
Output Qty: 50,000
RP: Plant Maintenance
(Maint. Labor)
Capacity: 30,000
Output Qty: 30,000
RP: Admin Labor
(Labor hours)
Capacity: 17,000
Output Qty: 17,000
Perform
Accting
Legend
S-Support
P- Production
Perform
Admin
P: Extrusion Line
RP: Extrusion Labor
(Labor hours)
Capacity; 32,000
Output Qty: 30,000
RP: Extrusion Machine1
(Machine hours)
Capacity; 17,520
Output Qty: 10,000
Department
S: Quality
Assurance
RP: QA Labor
(Labor hours)
Capacity: 14,000
Output Qty: 14,000
QA
Testing
Resource Pool
Abbreviated RP
Activity
Product
Returns
Manufacturing Costs
Product Support Cost
Product P&L
Plant P&L
Noncausal Costs
38
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
39
The RCA Modeling Approach
1. Model the resources, their capacity, and where they
are consumed
2. Model the quantities of resources consumed, and the
nature of that consumption
• Nature = Fixed or Proportional
3. Model the costs that flow with the quantities and the
nature of the consumption
40
Step 1:
Model Resources, Capacities, and Consumption Path
Direct
Materials
Capacity
Unlimited
Plant Labor
Capacity
240 Hrs
Plant
Maintenance
Capacity
240 Hrs
Finished Product
Idle Plant & Maintenance Labor
Training
Corporate Headquarters
HQ Reporting
41
Step 2:
Model Consumption Rates and Nature
Proportional
Fixed
Direct
Materials
Capacity
Unlimited
Capacity
240 Hrs
4 hrs. per unit
Plant Labor
Capacity
240 Hrs
2 hrs. per unit
Plant
Maintenance
1 lbs. per unit
Finished Product
30 hrs. per
month
80 hrs. per
month
Calculated
based on
production
80 hrs. per
month
Corporate Headquarters
80 hrs. per
Month
Idle Plant & Maintenance Labor
Training
HQ Reporting
42
Step 3 Add Costs and Flow with Resource Quantities
Proportional
Fixed
Direct
Materials
Capacity
Unlimited
$10
per unit
1 lbs. per unit
$200
4 hrs. per unit
Plant Labor
Capacity
240 Hrs
$0.83
per hr
30 hrs. per
month
$300
2 hrs. per unit
$1.25
per hr
80 hrs. per
month
Plant
Maintenance
Capacity
240 Hrs
Corporate Headquarters
Finished Product
Materials
xx
Proportional Cost
xx
Fixed Cost
xx
Calculated
based on
production
Idle Plant & Maintenance Labor
80 hrs. per
month
Training
80 hrs. per
Month
Idle Labor
Fixed-Training
xx
xx
HQ Reporting
Fixed–HQ
Reporting
xx
43
MANAGERIAL ACCOUNTING – MULTI-LEVEL P&L
Proportional
Cost
Fixed Cost
Direct
Materials
Capacity
Unlimited
$10
per unit
1 lbs. per unit
$200
4 hrs. per unit
Plant Labor
Capacity
240 Hrs
$0.83
per unit
30 hrs. per
month
$300
2 hrs. per unit
$1.25
per unit
80 hrs. per
month
Plant
Maintenance
Capacity
240 Hrs
Calculated
based on
production
Product P&L
Revenue
Materials
xx
Proportional Cost
xx
Fixed Cost
xx
Product Margin
Corporate Headquarters
80 hrs. per
Month
xx
Plant P&L
Idle Labor
xx
Fixed - Training
xx
Plant Margin
80 hrs. per
month
xx
xx
Corporate P&L
Fixed HQ
Reporting
Corporate Margin
xx
xx
44
• Resource Consumption Accounting II: Modeling
and Applications
– Overview of RCA Modeling
– Applications & Results
– Options for supporting technology
45
Plastic Film Extrusion
 Pre-RCA Issues
 Product costs fluctuated based on unrelated changes in volume
and mix
 Products manufactured on newer machines receive greater cost
allocations even if the products were identical
 Old machines were fully utilized and new machines underutilized
 Sales reps lowered selling prices (non-strategically) to increase
volume in an effort to decrease allocated cost per unit and thus
‘improve’ their margin
 RCA Results
 Product cost is stable even if machine is replaced by a new one
 Allocated fixed cost changes due to volume and mix resolved
 Machine utilization issues resolved by cost depreciation
 Margin manipulation eliminated; in fact, it was shown that
Standard Costing overstates fixed costs.
46
Semi-conductor Business
• Product Pricing
– Life cycle product pricing vs. short-term product pricing
– Because equipment is old (fully depreciated) RCA provided a
window on the long-term profitability of product decisions
• Cost Attribution
– Proper attribution of common fixed costs to market segments
e.g., machine excess/idle capacity to a product group
– The gross margin of the product group reduced by 63%
• Batch Sizes
– Understand the effect of smaller batch sizes on profitability
– Normal batch = 24; most often manufactured small batch
product had a 22% drop in gross margin at batch = 12
• Product Mix
– Understand factory bottlenecks for different volume and mix
– Know how the bottleneck moves for a given volume and mix
– Simulations pointed to two potential bottlenecks
47
Automotive OEM
 Business Scenario
 A green-field automotive original equipment manufacturer (OEM)
 Acquired their way into the automotive business by buying the
rights to make and re-badge a model from another OEM
 Large SAP implementation
 The need to integrate highly automated support areas (e.g.,
automated storage and retrieval warehouse) into the costing
model
 RCA Cost Model
 Significant royalty costing at various levels in the BOM
 The ability to run the cost model from resources through to
products and sales (i.e., typical costing) or to run the model
backwards from projected sales volumes to resource demand
 Effective capacity management a primary objective also for
support areas
48
Cormatech – MESA Metrics
Challenge
• Real time dashboard of key KPI’s allows for quicker
reaction to out of range operations performance
• Focus is on KPI’s that are financial drivers
• Can drill down to financial detail
• Retail time target spending, must continue to work to get
timely actual financial data
• Can simulate financial impact of changes to operations
KPI’s
Sample Data / Illustration Only
Deliver innovative products and services that improve air quality and maximize stakeholder value
Multiple users have different needs
for looking at the data - Ease of use
is the key to adoption of this
application.
Home
Financial Perspective
Customer Perspective
Internal Processes
Learning & Growth
This Balanced Scorecard
summarizes Key
Performance Indicators
from several critical
systems of Cormetech.
Select a Perspective to drill
through the detailed
analysis.
Sample Data / Illustration Only
Home
Financial Perspective
All Facilities
Customer Perspective Internal Processes
Facility 1
Learning & Growth
Facility 2
Total Costs Analysis
Quick and clear understanding of
Financial Perspective
trends, drives correct problem
recognition
June 2011
Drill-Down
Sample Data / Illustration Only
Home
Financial Perspective
All Facilities
Customer Perspective Internal Processes
Facility 1
Learning & Growth
Facility 2
Total Costs Analysis
Drill-downs enable quick detailed
analysis with icons: the forming line
and extruder need further analysis
Financial Perspective
June 2011
Detail
s
Sample Data / Illustration Only
Home
Financial Perspective
All Facilities
Customer Perspective Internal Processes
Facility 1
Learning & Growth
Facility 2
Cost Center Analysis / Extruder
In this case actual maintenance
costs are higher than target, so this
is where investigation would start.
(Variance is based on a percentage
range over target)
Financial Perspective
Sample Data / Illustration Only
Home
Financial Perspective Customer Perspective Internal Processes
All Facilities
Facility 1
Learning & Growth
Facility 2
Customer Profitability Analysis by Project
Combining revenue and costs allows
Customer
Perspective
decisions based on profitability. Can
Customer Perspective
also drill down to a customer by
customer basis.
Sample Data / Illustration Only
Home
Financial Perspective Customer Perspective Internal Processes
Product Composition
Production
Product Composition / Product A
Internal Processes
70 %
The single shared model gives
common understanding of product
line performance for all users
(product managers, engineers, etc.)
Learning & Growth
Sample Data / Illustration Only
Home
Financial Perspective Customer Perspective Internal Processes
Product Composition
Learning & Growth
Production
Production Efficiency / Product A
Internal Processes
Managers can simulate the impact of future
decisions using (+/- icons). Very helpful in
forecasting.
Sample Data / Illustration Only
Home
Financial Perspective Customer Perspective Internal Processes
Product Composition
Learning & Growth
Production
Production Efficiency / Product A
Internal Processes
Drill-through shows daily trends with more detail several days with different production output. Again
,can simulate changes using +/- icons
• Resource Consumption Accounting II: Modeling
and Applications
– Overview of RCA Modeling
– Applications & Results
– Options for supporting technology
58
Technology Options
 Large ERP
Involved in Research and Development of RCA
 Best of Breed
Management Accounting Suite of Products Intended to Bolt
onto Medium and Large ERPs
 Business Intelligence (BI/BW)
An Open-source Business Intelligence Application
that Runs on Excel
59
RCA Institute Objectives
• Improve Management Accounting Knowledge and
Practice
– Focus on Decision Support for Enterprise Optimization
• Build A Highly Structured and Disciplined RCA Community
– Create Standard Body of Knowledge and Standards of Practice
– Initial Objective is 150-200 Highly Skilled Practitioners (The
Tipping Point)
– Provide A Professional Structure that Minimizes Risk to RCA
Adopters
60
RCA Support & Quality Assurance
• Institute Membership
– Corporate & Individual
• Certification
– Specialist, Practitioner, Master
– Software Products
• Adopter Exploratory Workshops
– Customized Workshops applying RCA to an organization
• Implementation Review/Assurance
– Support Adopting Organizations & Practitioner Expertise
• Adopter Internal Use Reviews
– Evaluations of An Organization’s Effectiveness Using and Maintaining
RCA
61
www.RCAInstitute.org
lwhite@rcainstitute.org
757 288 6082
62