building resource consumption accounting...
TRANSCRIPT
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Back to Basics in Management Accounting: Resource Consumption
Accounting
CAPT Larry R. White, CMA, CFM, CPA, CGFM
Commanding Officer, USCG Finance Center
Anton van der MerwePrinciple, Alta Via Consulting, LLC
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Back to Basics: RCAFoundational Management Accounting Concepts
RCA Overview
RCA Go To Market
What Happened During The Incubation Phase
The Road Forward
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What is Enterprise Optimization?
• To Maximize Revenue or Mission Outcomes
• To Minimize Cost or Redeploy Financial Resources
Decisions On the Use of:
• Existing Resources and Capabilities; or
• Incremental Changes
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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• Providing Insight into Future Outcomes… Usually
with Invested Resources or Incremental Changes
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What Causes Costs?
Resources (also creates any revenues!)
Inputs ResourcePool
Output
Another ResourcePool (s)Or Final
Product/Service
Support or
Production
ResourceQuantities
and Activities/Processes
LaborMachinesMaterial
IT Resources
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What Are the Primary Characteristics of Resources?
• Capability– Quality or Qualitative Characteristics
• Cost – Cost Structure– Cost Behavior
• Capacity– Quantity They Provide
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How Do We Define Capacity?• Productive• Non-Productive• Idle/Excess
More 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
“Relevant Range”
Which Cost Concepts Must Form the Basis for Cost Modeling?
Decision Support
UnavoidableAvoidable
Opportunity Cost
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What Types of Decisions Are Needed for Enterprise Optimization?
Too Many, Too Diverse, Too SituationalImpossible to Categorize
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What Constitutes an Effective Model of Operations & Costs?
Key Principles:• Causality• Responsiveness• Work or Process Visibility
Resource Divisibility is Necessary to Identify and Assess Cost Avoidability
Insight into Resource Divisibility is the Key to Effective Decision Support Information!
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Principle of Causality• Cause and Effect Relationship Exist and Must Be
Accurately Modeled – For Manager’s Decisions (not just GAAP)– At Each Step in the Value Chain – From Resource Pool to Resource Pool to Final Product or Service– Idle Capacity must be Isolated at Each Resource Pool
• How Close Can You Get to Full Cost and Maintain the Principle of Causality?
Attributable CostThe Essential Cost Concept for Decision Support
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Principle of Responsiveness
Product A Product B
Service 1 Service 2 Service 3
Total Volume
$’s
Change in Total $’s Due to a Change in
Total Volume
Fixed Cost
Variable Cost
Product A Product B
Service 1 Service 2 Service 3
Output
Inputs
Output
Inputs
Output
Inputs
Output
Inputs
Output
Inputs
Traditional: Total Cost to Total Volume
Value Chain Modeling of Resource Pools
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What is Responsiveness?• Consumption Behavior must Respond to Causal
Relationships– Fixed Responsiveness– Proportional Responsiveness
• Integrity of Resource Quantities and their Costs are Maintained – Requires Careful design of Resource Pools– Each Resource Pool must provide Discrete, Homogeneous
Resource/Capability
• Clear Insights into Organizational, Product Line, Batch, & Unit level Cost Behaviors is Always Available in the Data
Provides Resource Divisibility Insights
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Traditional 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 Proportional Cost= Contribution Margin- Product Fixed Cost= Product Gross Margin- Non-Product Proportional Costs= Margin 3- Non-Product Fixed Cost= Margin 4- Excess/Idle Capacity Costs= Margin 5
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Principle of WorkInsights into Process Effectiveness
Without the Work Principle:
Resource Pool A Product 123Planned Output: 1,000 Hrs
Actual Output: 1,100 HrsInputs:
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 HrsRun Machine 800 Hrs
Setups
Run Machine
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Back to Basics: RCAFoundational Management Accounting Concepts
RCA Overview
RCA Go To Market
What Happened During The Incubation Phase
The Road Forward
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4 Stages of Cost Management & Performance Measurement Systems*• Stage 1 - Inadequate for Financial reporting
• Stage 2 - Financial-reporting Driven
• Stage 3 – Stand-alone
• Stage 4 - Integrated Cost Management, Financial Reporting and Performance Measurement
*Kaplan, R. S. & Cooper, R. (1997). Cost and Effect, Harvard Business School Press: Boston, MA.
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What is 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– 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– Principle Based– Highlights Resource Divisibility
RCA
Resource view
Advantages
Process viewAdvantages
GPK ABC
Capacity Analysis and Management
Process Analysis and Management
Capacity-Focused
Activity-Focused
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RCA: The Fundamental DifferenceOperational Integration
• Breaking the “Tapestry Syndrome”• Stop Trying to Get Management Accounting Information
from the Financial Accounting General Ledger
Source Document: Goods Receipt
Qty
$’s
Raw Material xxx kgs
Raw Material $ xx.xx
Traditional Practice
Quantity Flows
Value Flows
Source Document: Goods ReceiptFor Raw Material A123
Material A123 xx kgs $yy.yyItem Qty Amount
Value Chain Integration
Quantity Flows
Value Flows
Source Document: Goods Receipt
Qty
$’s
Raw Material xxx kgs
Raw Material $ xx.xx
Source Document: Goods ReceiptFor Raw Material A123
Material A123 xx kgs $yy.yyItem Qty Amount
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Traditional 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 Proportional Cost= Contribution Margin- Product Fixed Cost= Product Gross Margin- Non-Product Proportional Costs= Margin 3- Non-Product Fixed Cost= Margin 4- Excess/Idle Capacity Costs= Margin 5
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What is Resource Consumption Accounting?
Pillar 1: Focus on Resources & their Consumption• Understand your Resources & Their Consumption… Understand Cost• Provides a Framework for Capacity Management
Pillar 2: Quantity Structure for Resource Consumption• Operational Quantities Drive Costs• Model the Operation & Use of Resources….then Apply Cost• Enables Resource Capacity Management• Demonstrates Causality of Value Chain Relationships
Pillar 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• Value Chain Modeling of Resource Cost Responsiveness
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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
Product P & L’s
Department
Resource PoolAbbreviated RP
Activity
RP: Chiller (Hours)Capacity: 50,000Output Qty: 50,000 Perfor
m
AccountingPerform
Admin
QA
Testing
Legend
S-Support
P- Production
Common Fixed Costs
Product
Returns
RP: Extrusion Machine1(Machine hours)Capacity; 17,520Output Qty: 10,000
RCA Storyboard
Manufacturing Costs
Budgeted Products
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
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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
• Variance Analysis• Target Cost Determination• 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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Back to Basics: RCAFoundational Management Accounting Concepts
RCA Overview
RCA Go To Market
What Happened During The Incubation Phase
The Road Forward
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A Challenging Marketplace• Multiple Philosophies, Approaches, Techniques:
Activity-Based Costing, Lean Accounting, Theory of Constraints, etc.
• Multiple Failed Attempts for Operational Decision Support Information
• Inconsistent Usage of Basic Principles by the Various Options (Avoidable/Unavoidable, Fixed/Variable, etc.)
• NOISE – What To Do for What Purpose?• Manager Confusion is at an All Time High
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A Challenging Marketplace
• Low Level of Knowledge About Management Accounting– Compared With Financial Accounting
• Cluttered, Undisciplined Market for Management Accounting Solutions– High Failure Rate– No Reliable Standards
• Investments in Management Accounting Systems Considered High Risk.
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The Normal Marketplace
• First Mover Advantage: The Early Bird Gets the Worm… and Benefits from It.
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Managers & The MA Marketplace
• Instead: The Early Bird Gets Eaten by The Worm… and the Other Birds Take Their Investment Dollars Elsewhere.
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RCA In The Marketplace • Although RCA’s Core Principles Are Well Proven (Over
3,000 Implementations) They Are Unfamiliar to the U.S. Market
• Other Approaches Have Been Down This Road In The U.S. and Highlighted What Needs to Be Avoided e.g., A Lack of Standards, A Free-For-All by Consultants and Software Vendors
• One Is Dealing With A Highly Skeptical Punch-drunk Decision Maker That Is At Least Twice Bitten and Now Thrice Shy
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The Tipping Point Methodology • The Realities of the Marketplace Required A Different Approach to
Rolling RCA Out• The Tipping Point Approach Was Adopted and Will Comprise Three
Phases:
2001 2008 ??
INCUBATIONPhase 1
COMMUNITYPhase 2
MARKET WIDEPhase 3
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Back to Basics: RCAFoundational Management Accounting Concepts
RCA Overview
RCA Go To Market
What Happened During The Incubation Phase
The Road Forward
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Incubation Phase Activities• The RCA Interest Group at CAM-I Comprised Users,
Practitioners and Academia• The Incubation Phase Was A Validation (Kicking the
Tires) Period• Involved A Number of Case Studies Targeting Diverse
Business Environments e.g., For Profit & Not For Profit, Manufacturing & Service, Commercial & Government
• A Number of Research Projects into GPK was Undertaken Through IMA’s FAR (Foundation for Applied Research)
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RCA Case Studies
Manufacturer: Clopay• A Global Plastics Extrusion Manufacturer of Plastic Film
Sheet Products for Medical & Hygiene Markets
• Used A Traditional Standard Costing System
• Experienced Fluctuating Product Costs when Volume and Mix Changes Occurred
• New More Efficient Machines Were Under Utilized and Old Fully Depreciated Machines Were Being Targeted for Extra Volume
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RCA Case StudiesAircraft Maintenance: Air Engines• A Global Service Provider that Specializes in the Repair
and Overhaul of Jet Engines
• Unpredictable Demand and Workload e.g., the Extent of Work On An Engine Is Only Known Once the Engine is Disassembled and Inspected
• Require a Solution that Could Dynamically Accommodate Fluctuating Resource Demand
• Could not Provide Customers with Motivation for Overhead Charges on Their Invoices
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RCA Case StudiesHospital: St Anonymous• A Community Based Not for Profit Hospital – the Case
Focused on the Outpatient Surgery Center (OSC)• Did Not Have Sufficient Insight Into Their Costs to be
able to Negotiate MediCare and MediAid Reimbursements
• Wanted to Understand which Surgical Procedures in the OSC Were Making and Losing Money
• Constructed the OSC with Two Additional Operating Room Shells and Wanted to Understand the Impact on Support Resource and Their Capacity
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RCA Case StudiesUniversity: UAMS• A $1 Billion Medical Sciences University that is Primarily
State Funded But Also Gets Federal and Private Research Grants
• Being Funding Driven, Did Not Have A Management Accounting System
• Did Not Understand Student Costs – Whether They Were Cross Subsidizing Out of State Students and How to Justify Their Funding Needs to the State
• University Would Not Be Able to Sustain Its Stated Missions at the Current Rate of Medical Cost Increases –Lacked Insight Into Resource Usage and Costs
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Back to Basics: RCAFoundational Management Accounting Concepts
RCA Overview
RCA Go To Market
What Happened During The Incubation Phase
The Road Forward
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The Community Phase
INCUBATIONPhase 1
COMMUNITYPhase 2
MARKET WIDEPhase 3
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The Community Phase
• The Community Phase Will Be Structured Around the:
INCUBATIONPhase 1
COMMUNITYPhase 2
MARKET WIDEPhase 3
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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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The RCA Institute Will…
• Be A Non-profit Entity • Seek An Affiliation with the Executive Education Branch of
A Top-Flight University (Negotiations Underway)• Responsible for Training of Practitioners and Adopters• Provide A Number of Products and Services to Mitigate
Adopter Risk e.g., Certification, Assurance Services• Sponsor Research into RCA Implementation and Long-
term Use• Serve to Raise RCA Awareness and Fulfill Advocacy and
Outreach Roles
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RCA Support & Quality Assurance• Institute Membership
– Corporate & Individual
• Certification– Specialist, Practitioner, Master
– Software Products
• 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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Individual Training CoursesProduct Name Product Description
Product Purpose
Competency Level
RCA-T101 The Current Management Accounting Landscape Introduction RCA Specialist
RCA-T102 RCA Terminology and Principles Introduction RCA Specialist
RCA-T201 Introduction to RCA Conceptual Design & Modeling Competency RCA Specialist
RCA-C001 Case Model: No Pain Case Competency RCA Specialist
RCA-T202 An Introduction to RCA Decision Support Competency RCA Practitioner
RCA-T301 Advanced RCA Conceptual Design and Modeling Competency RCA Practitioner
RCA-T302 Effective Enterprise Management – RCA Adopted Competency RCA Practitioner
RCA-M101 Methodology Training Mastery RCA Master
RCA-T401 RCA Certification Mastery RCA Master
RCA-D101 RCA Overview Decision Maker
RCA-D102 RCA Decision Support Decision Maker
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Launch Date: 1 August 2008
Website: www.RCAInstitute.org
Interview: Cost Management magazineJuly/August Edition