1 resource consumption accounting: manager focused management accounting larry r. white, cma, cfm,...

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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

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

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Enterprise Financial Management

Financial Accounting

Cost Measurement

Managerial Accounting

Cost AccountingExternal financial Reporting

e.g. GAAP, IFRS

Performance Evaluation & Analysis

Planning & Decision Support

• Costs of goods sold• Inventory valuation

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

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)

Historical Predictive

The Domain of Costing

Tax Accounting

Value-added to managerial decisions

Source data capture

(transactions)

Non-financial data capture

Lower Higher

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RCA Recognition

Traditional StandardCosting

Activity Based Costing

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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

• 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

RCA

Resource view

Advantages

Process view

Advantages

GPK ABC

Capacity Analysis

and Management

Process Analysis and Management

Capacity-Focused

Activity-Focused


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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

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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

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Resources (also creates any revenues!)

ResourcePool

Another ResourcePool (s)Or Final

Product/Service

Organizational Element(Support or Production)

Material/CommodityLabor

EquipmentOperating Budget

MaterialServices

(ReflectingResourcesApplied)

Fixed

OUTPUT

Proportional

Resource Quantities Drive Monetary Quantities

What Causes Costs?

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More Realistic Resource Flows

Final Output 1

Final Output 2

Final Output 3

Final Output 4

Resource Pool A

Resource Pool E

Resource Pool H

Resource Pool F

Resource Pool G

Resource Pool B

Resource Pool C

Resource Pool D

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What Are the Primary Characteristics of Resources?

• Capability– Quality or Qualitative Characteristics

• Capacity– Quantity They Provide

• Consumption/Cost – Consumption/Cost Structure– Consumption/Cost Behavior

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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?

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Cost Concepts

Operational

Fixed Variable

Which Cost Concept Must Form the Basis for Cost Modeling?

Decision Support

UnavoidableAvoidable

Opportunity Cost

“Relevant Range”

Can be Modeled Basis for Action

Divisibility of Resource Information

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IMA Managerial Costing Conceptual Framework Task Force

What Constitutes an Effective Model of Operations & Costs?


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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.

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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.

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RCA Structure for Marginal CostingRCA Structure

Quantitative

Definition of Material Causal Relationships

Support/Secondary Resource Pools

Support/Secondary Activities

Primary Resource Pools

Primary Activities

Product/Service Objects

Result Segments

WeakCausal

Relationship

Concept: ResponsivenessInsights into the Nature of Cost & Consumption

Product A

Product B

Service 1 Service 2 Service 3

An Output

Inputs &their $’s Fixed

Inputs

Proportional Inputs

An Output


Inputs

Proportional Inputs

An Output

Inputs &their $’s

Fixed Inputs

Proportional Inputs

An Output


Inputs

Proportional Inputs

An Output


Inputs

Proportional Inputs

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Variability Responsiveness

Product A Product B


Total Volume

$’s

Change in Total $’s Due to a Change in

Total Volume

Fixed Cost

Variable Cost

Product A Product B


Output

Inputs

Output

Inputs

Output

Inputs

Output

Inputs

Output

Inputs

Traditional Principle of Variability: Total Cost to Total Volume

Responsiveness

Examples of RCA Multi-Level P&L

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Costing Continuum/Levels of Maturity

No Marginal Insight

Marginal Insight Awareness DetailedMarginal Insights

Descriptive: Expense Tracking, Cost Reporting and Consumption RatesPredictive: Demand Planning Driven with

Capacity Sensitivity

1Blind

Book-keeping

Nomarginal insights

Process/ lean accounting

2ProcessVisibility

Direct cost to outputs

Limitedprocessmarginal insights

Add indirect costs

4Output

Visibility

Direct costmarginal insights

All outputcostmarginal insights

5Explicit Outputs

Output specific marginal insights

Individual std costs, project & job costing

Push activity-based costing (ABC), Product costs

Explicit output marginal insights

6Explicit IndirectCosts

7Customer Demand Sensitive

Level 6 with customer & channel profitability reporting; Cost-to-serve

8Unused Capacity

Aware

Add customer & channel marginal insights

Unused capacity costs (estimated)

Common fixed costs begin to be isolated

9Pull ABC Resource Planning

10Time-

driven ABC

11RCA

Explicit resource cost object, supply-based denomina-tor, strong & weak forms of causality catered for

12Simulation

No change

(ABRP); forecast driver quantities X std unit rates, driver-based budgeting

Increased ability to isolate common fixed costs

Increased ability to isolate common fixed costs

(TDABC); forecast driver quantities X std unit rates; direct cost focus; repetitive work conditions

Finite systems modeling

Attributable costs on all objects, blends activity and direct resource charges, consumes activities back to resources

3Output

Visibility

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Concept: WorkInsights into Process Effectiveness

Without the Work Principle:

Resource Pool A Product 123

Planned Output: 1,000 Hrs

Actual Output: 1,100 Hrs

Inputs:

Using the Work Principle:

Product 123Inputs:

Resource Pool APlanned Output: 1,000 Hrs

Actual Output: 1,100 Hrs

Pool A 1,100 Hrs

Setups (Qty 10) 300 Hrs

Run Machine 800 Hrs

Setups

Run Machine

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Integrated Data Orientation

Source Document: Goods Receipt

Qty

$’s

Raw Material xxx kgs

Raw Material $ xx.xx

Traditional Practice

Quantity Flows

Value Flows


For Raw Material A123

Material A123 xx kgs $yy.yy

Item Qty Amount

Value Chain Integration

Quantity Flows

Value Flows


Qty

$’s

Raw Material xxx kgs

Raw Material $ xx.xx


For Raw Material A123

Material A123 xx kgs $yy.yy

Item Qty Amount

Integrated Data

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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

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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

• Resource Consumption Accounting II: Modeling and Applications– Overview of RCA Modeling– Applications & Results – Options for supporting technology

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Operational & Financial Alignment

Resource/Resource Pools

Processes/Value Streams

Intermediate Outputs

Products/Services

Operational View Financial View

Real TimeAction OrientedInternally Focused

FR TimeReport Oriented

Externally Focused

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Direct

Indirect 2

Indirect 1

Product

P&L

RCA Modeling

Traditional Standard Costing

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Direct

Indirect 2

Indirect 1

Product

P&L

Standard Costing

Direct

Indirect 2

Indirect 1

Product

P&L

Activity 1 Activity 2

RCA Modeling

Activity BasedCosting

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Direct

Indirect 2

Indirect 1

Product

P&L

Standard Costing

Direct

Indirect 2

Indirect 1

Product

P&L

Activity 1 Activity 2

ABC

Product

P&L

Activity 1

Indirect 1

Indirect 2

Direct

Non-causal Costs

RCA Modeling

RCA

RCA Storyboard

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RCA Storyboard

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: Plant Maintenance (Maint. Labor)Capacity: 30,000Output Qty: 30,000

P: Extrusion Line

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

Plant P&L

Department

Resource PoolAbbreviated RP

Activity

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

Perform Accting

Perform Admin

QATesting

Legend

S-Support

P- Production

Noncausal Costs

ProductReturns

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

Manufacturing Costs

Product P&L

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

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

Perform HR

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

Primary Costs Fixed Proportional

Technician Wages -$ 600,000$

Supervisor Salary 80,000$ -$

General Material 12,000$ 100,000$

Depreciation: Shop Equipment 50,000$ -$

142,000$ 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 22 0 1,100$ -$ Purchase: Gen Materials # PO's 10 200 500$ 10,000$

7,600$ 34,000$

Total Resource Pool Costs 149,600$ 734,000$

Unit Cost Rates (/20,000 Hrs) 7.48 36.70

RCA Information

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

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The RCA Modeling Approach

Corporate Headquarters

Step 1: Model Resources, Capacities, and Consumption Path

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Plant Labor

Direct Materials

Capacity240 Hrs

Capacity240 Hrs

CapacityUnlimited

Finished Product

Training

HQ Reporting

Idle Plant & Maintenance Labor

Plant Maintenance


Step 2: Model Consumption Rates and Nature

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Plant Labor

Direct Materials

Capacity240 Hrs

Capacity240 Hrs

CapacityUnlimited

Finished Product

Training

HQ Reporting

1 lbs. per unit

4 hrs. per unit

2 hrs. per unit

80 hrs. per month

80 hrs. per month

80 hrs. per Month

80 hrs. per Month

30 hrs. per month

30 hrs. per month

80 hrs. per month

80 hrs. per month


Plant Maintenance

Calculated based on

production

Proportional

FixedFixed


Step 3 Add Costs and Flow with Resource Quantities

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Plant Labor

Direct Materials

Capacity240 Hrs

Capacity240 Hrs

CapacityUnlimited

Finished Product

Training

HQ Reporting

1 lbs. per unit

4 hrs. per unit

2 hrs. per unit

80 hrs. per month

80 hrs. per month

80 hrs. per Month

80 hrs. per Month

30 hrs. per month

30 hrs. per month

80 hrs. per month

80 hrs. per month


Plant Maintenance

Calculated based on

production

Materials

Proportional Cost

Fixed Cost

xx

xx

xx

Idle Labor

Fixed-Training

xx

xx

Fixed–HQ Reporting

xx

$300$1.25 per hr

$200$0.83 per hr

$10 per unit

Proportional

FixedFixed


MANAGERIAL ACCOUNTING – MULTI-LEVEL P&L

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Plant Labor

Direct Materials

Capacity240 Hrs

Capacity240 Hrs

CapacityUnlimited

1 lbs. per unit

4 hrs. per unit

2 hrs. per unit

80 hrs. per month

80 hrs. per month

80 hrs. per Month

80 hrs. per Month

30 hrs. per month

30 hrs. per month

80 hrs. per month

80 hrs. per month

Plant Maintenance

Calculated based on

production

$300$1.25

per unit

$200$0.83

per unit

$10 per unit

Proportional Cost

Fixed CostFixed Cost

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Corporate P&L

Plant P&L

Product P&L

Materials

Proportional Cost

Fixed Cost

xx

xx

xx

Idle Labor

Fixed - Training

xx

xx

Fixed HQ Reporting xx

Revenue xx

Product Margin xx

Plant Margin xx

Corporate Margin xx


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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.

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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

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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

Automotive OEM

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

Home

Deliver innovative products and services that improve air quality and maximize stakeholder value

Customer Perspective

Learning & Growth

Financial Perspective

Internal Processes

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

Multiple users have different needs for looking at the data - Ease of use is the key to adoption of this application.


Customer Perspective Learning & GrowthFinancial Perspective Internal ProcessesHome

All Facilities Facility 1 Facility 2

June 2011

Total Costs Analysis

Drill-Down


Quick and clear understanding of trends, drives correct problem recognition




Total Costs Analysis

June 2011

Details


Drill-downs enable quick detailed analysis with icons: the forming line and extruder need further analysis




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)

Customer Perspective



Customer Profitability Analysis by Project


Customer PerspectiveCombining revenue and costs allows decisions based on profitability. Can also drill down to a customer by customer basis.

Internal Processes


70 %

Product Composition Production

Product Composition / Product A


The single shared model gives common understanding of product line performance for all users (product managers, engineers, etc.)

Internal Processes


Production Efficiency / Product A



Managers can simulate the impact of future decisions using (+/- icons). Very helpful in forecasting.

Internal Processes


Production Efficiency / Product A



Drill-through shows daily trends with more detail - several days with different production output. Again ,can simulate changes using +/- icons


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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

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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

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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

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www.RCAInstitute.org

[email protected]

757 288 6082

http://www.rcainstitute.org/

mailto:[email protected]

1 resource consumption accounting: manager focused management accounting larry r. white, cma, cfm,...

Documents

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costing slide

management process analysis

manager focus principles

activitybased costing

resource pool s

companies rca

german cost management