Resource Consumption Accounting DetailedMarginal Marginal Insights Costing Continuum/Levels of...

Resource Consumption Accounting

Larry R. White, CMA, CFM, CGFM, CPA

Executive Director, RCA Institute

Former Chair, IMA 2004/5

Agenda

1. Introduction

2. Overview of RCA Capabilities

– What information RCA can provide for your business

3. Overview of an RCA Model

– How an RCA Model operates

4. RCA Modeling

– How an RCA model is built.

RCA Institute All Rights Reserved 2

RCA Recognition

• International Federation of Accountants (www.ifac.org)

– International Good Practice Guide: Improving and Evaluating

Costing in Organizations

– IFAC Information Paper: Evaluating The Costing Journey: A

Costing Levels Continuum Maturity Model

• Manufacturing Enterprise Solution Association

(www.mesa.org)

– Metrics Guidebook and Framework

– Global Education Program: Certificate of Awareness and Certificate

of Competency in Manufacturing Execution Systems/Manufacturing

Operations Management


RCA Recognition

• Developed as an Interest Group of the Consortium for

Advanced Management – International (www.cam-i.org)

• Institute of Management Accountants

– Extensive research on German management accounting and RCA

– RCA Institute has lead role in Task Force drafting a Conceptual

Framework for Managerial Costing.

• Presentations at:

– Association of Government Accountants

– Federal Accounting Standards Advisory Board

– American Institute of Certified Public Accountants

– American Society of Military Comptrollers

– Beyond Budgeting Roundtable

– Institute of Management Accountants


Enterprise Financial Management

Financial

Accounting

Cost Measurement

Managerial

Accounting

Cost Accounting External 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

RCA Recognition


Copied from IFAC Information Paper: Evaluating The Costing

Journey: A Costing Levels Continuum Maturity Model.

Activity Based

Costing

Traditional Standard

Costing

Diagram from IFAC Information Paper:

Evaluating The Costing Journey: A Costing

Levels Continuum Maturity Model

www.ifac.org

7 Detailed

Marginal Insights

Costing Continuum/Levels of

Maturity

No Marginal Insight

Marginal Insight Awareness

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

Capacity Sensitivity

1 Blind

Book- keeping

No marginal insights

Process/ lean accounting

2 Process Visibility

Direct cost to outputs

Limited process marginal insights

Add indirect costs

4 Output

Visibility

Direct cost marginal insights

All output cost marginal insights

5 Explicit Outputs

Output specific marginal insights

Individual std costs, project & job costing

Push activity-based costing (ABC), Product costs

Explicit output marginal insights

6 Explicit Indirect Costs

7 Customer Demand Sensitive

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

8 Unused Capacity

Aware

Add customer & channel marginal insights

Unused capacity costs (estimated)

Common fixed costs begin to be isolated

9 Pull ABC Resource Planning

10 Time- driven ABC

11 R C A

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

12 Simulation

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

3 Output

Visibility

8

Resource Consumption Accounting

• RCA Inherits Core Principles from German Cost Management

– Grenzplankostenrechnung (GPK) Translated – Flexible Analytic Cost Planning & Control

– Well Established Standard Costing System

– Principles in Practice since late 1940’s

– Implemented by 3,000+ Companies

• RCA Integrates

– Activity-based Costing &Throughput Concepts

• RCA Creates an Integrated Economic Model of Operations for Decision Making

– Enterprise Optimization

– 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

Agenda

1. Introduction


– What information RCA can provide for your business



4. RCA Modeling

– How an RCA model is built.


RCA Information

• RCA’s Objectives

– Information for Management Decisions

• Most Management Decisions are Incremental

– Take an order, Invest in a small scale improvement

• Evaluate options and choices

– Opportunity Costs

– Information to Optimize Your Enterprise’s Operations for

Maximum Profit (achievement of strategic objectives)

• Learning

• Evaluating

• Planning

• Projecting


RCA Information

• Resource Capacity Information

– RCA integrates operational and cost information on the

capacity of your resources

• Resources and their consumption is modeled.

• Money is a flexible meta-language or shorthand.

– Capacity is critical info to optimize the organization

• Productive

• Nonproductive

• Idle and Excess

– Understand the nature of resource capacity costs

• Provisioning Costs

• Use Costs


RCA Information

• Cost Information

– The focus of RCA is ensuring costs reflect the

underlying resources and processes engaged to create

value for products, services, customers

– RCA retains the cause and effect relationships between

resources and their output to generate cost information

• Resource Capacity Costs

• Fixed Costs

• Proportional Costs

• Marginal Costs

• Clear Insights into Avoidable and Unavoidable Costs


RCA Information

• Segmentation of Information

– RCA’s approach to modeling the organization’s

operations at the resource level results in information

that can be viewed in many dimensions

• Product or Service Cost

• Customer Cost

• Distribution Channel cost

– Match cost information to revenue dimensions


Agenda

1. Introduction


– What information RCA can provide for your business.



4. Implementing RCA

– How an RCA model is built and what an RCA project entails.


Connects Operations & Finance

Resource/Resource Pools

Processes/Value Streams

Intermediate Outputs

Products/Services

Operational View Financial View

Real Time

Action Oriented

Internally Focused

FR Time

Report Oriented

Externally Focused

Resources

Define as Resource Pools Based on Output (and Capability)

Resources

• Capability

– Qualitative Characteristics

• Capacity

– Productive

– Non-Productive

– Idle/Excess

• Consumption Characteristics

– Relationship to Output

– Operational Quantity and Cost


Model Resource Relationships

Output

Responsiveness

20

Machine A Machine B

Variability

21

Machine A Machine B

Relationship of Resources to Output & Summarize

Primary

Consumption

Relationships

Relationship of Resources to Output

Primary

Consumption

Relationships

24

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$ 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

Trace Consumption Relationships between Resource Pools

Primary

Consumption

Relationships

Secondary

Consumption

Relationships

26

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$ 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

Summarize

Primary

Consumption

Relationships

Secondary

Consumption

Relationships

The RCA Model

1. Identify the Resources

– Identify the organization’s highest level managerial objectives

– Identify the resources that produce those objectives

– Identify the support resources

– Capture any other organizational resources

– Resources are grouped into logical resource pools based on their

characteristics, output, and relationship to managerial objectives

2. Identify the Resource Relationships

– Map the cause and effect relationships between resources

– Map the flow of resources between resource pools to final

managerial objectives

• Track fixed and proportional relationships


The RCA Model

• At this point, you have created a cause and effect

based model of your operations.

– You can see resource capacity issues and

opportunities.

3.Apply Costs to the Model

– Resource costs are determined and applied to the

modeled relationships

You can now see the cost of operations and have

the operational, capacity, and cost information for

decisions and planning.


Simple Example


Service/

Product

Dimensional

P&L Service, Customer,

Etc.

Activity 1

Indirect 1

Indirect 2

Direct

Non-causal

Costs

RCA Storyboard Presentation at MESA US Conference

Metrics Makeover Contest

RCA Storyboard

Agenda

1. Introduction


– What information RCA can provide for your business.



4. RCA Modeling Example

– Continue or Go To Slide 56


Get Well Plant

Weigh and Mix

Manual Additions

Storage & Material

Line 2 No Pane, Burn away , Better beat, or relief capsules

Pill weigh & Press

Weigh & capsule

Blister or Bottle, weigh &inspect

Seal, Package, inspect

Weigh and Mix

Line 1 Burn away or relief capsules

Bottle, weigh &inspect

Seal ,Package, inspect

To Distribution

Product Testing & Storage

Manufacturing Clean Room

Product Testing & Storage

Weigh & capsule

Pill weigh &Press

Pill Coat Print

inspect

inspect

Distribution-Tonmiles: 150000

Qty Dollars

Primary Fix Var. Total

Salaries 60,000 0 60,000

Fring.Benfit 24,000 0 24,000

Supplies 1,000 50,000 51,000

Deprection 70,000 0 70,000

Electricity

Maintenance - Laborhr: 11232

Qty Dollars


Salaries 50,000 180,000 230,000

Fring.Benfit 20,000 72,000 92,000

Supplies 100 700 800

Deprection 1,000 0 1,000

Electricity

System Sup. - Infr: 27

Qty Dollars


Salaries 130,000 0 130,000

Fring.Benfit 52,000 0 52,000

Supplies 300 0 300

Deprection 20,000 0 20,000

Electricity 0 0 0

Util. & Fac. - SqFt: 89000

Qty Dollars


Salaries 40,000 0 40,000

Fring.Benfit 16,000 0 16,000

Supplies 300 0 300

Deprection 50,000 0 50,000

Electricity 0 0 0

Util. & Fac. - Kwh: 233000

Qty Dollars


Salaries 0 0 0

Fring.Benfit 0 0 0

Supplies 300 700 1,000

Deprection 10,000 0 10,000

Electricity 0 10,000 10,000

No Pane

Better Beat

Burn Away

Relief

Line 1

Productn 1-Labor hrs: 14144 Productn 1-Mach hrs: 2000

Qty Dollars Qty Dollars

Primary Fix Var. Total Primary Fix Var. Total

Salaries 100,000 240,000 340,000 Salaries 0 0 0

Fring.Benfit 40,000 96,000 136,000 Fring.Benfit 0 0 0

Supplies 0 2,700 2,700 Supplies 500 2,000 2,500

Deprection 0 0 0 Deprection 50,000 0 50,000

Line 2








Packaging

Packaging-Labor hrs: 19968 Packaging : Mach. hrs 4000








Qty Dollars


Salaries 60,000 0 60,000

Fring.Benfit 24,000 0 24,000

Supplies 1,000 50,000 51,000

Deprection 70,000 0 70,000

Electricity


Qty Dollars


Salaries 50,000 180,000 230,000

Fring.Benfit 20,000 72,000 92,000



Electricity


Qty Dollars


Salaries 130,000 0 130,000

Fring.Benfit 52,000 0 52,000

Supplies 300 0 300

Deprection 20,000 0 20,000

Electricity 0 0 0


Qty Dollars


Salaries 40,000 0 40,000

Fring.Benfit 16,000 0 16,000

Supplies 300 0 300

Deprection 50,000 0 50,000

Electricity 0 0 0

Util. & Fac. - Kwh: 233000

Qty Dollars


Salaries 0 0 0

Fring.Benfit 0 0 0

Supplies 300 700 1,000

Deprection 10,000 0 10,000


No Pane

Better Beat

Burn Away

Relief

Line 1








Line 1








Secondary Secondary

Maint(Labr) 0 0 0 Maint(Labr) 2,050 21,483 46,242 67,724

Fac(SqFt) 5,000 9,611 0 9,611 Fac(SqFt) 20,000 38,446 0 38,446

Fac(Kwh) 0 0 0 Fac(Kwh) 80,000 6,656 7,546 14,202

Syst.(Infra) 3 36,410 0 36,410 Syst.(Infra) 0 0 0 0

Total$ 186,021 338,700 524,721 Total$ 117,084 55,788 172,872

Rate $13.15 $23.95 $37.10 Rate $58.54 $27.89 $86.44

Line 2








Line 2








Secondary Secondary

Maint(Labr) 0 0 0 0 Maint(Labr) 1,350 14,147 30,452 44,599

Fac(SqFt) 5,000 9,611 0 9,611 Fac(SqFt) 20,000 38,446 0 38,446

Fac(Kwh) 0 0 0 0 Fac(Kwh) 80,000 6,656 7,546 14,202

Syst.(Infra) 5 60,683 0 60,683 Syst.(Infra) 2 24,273 0 24,273

Total$ 140,294 170,700 310,994 Total$ 158,821 39,898 198,720

Rate $22.48 $27.36 $49.84 Rate $79.41 $19.95 $99.36

Packaging








Packaging








Secondary Secondary

Maint(Labr) 0 0 0 0 Maint(Labr) 4,500 47,157 101,507 148,663

Fac(SqFt) 5,000 9,611 0 9,611 Fac(SqFt) 20,000 38,446 0 38,446

Fac(Kwh) 0 0 0 0 Fac(Kwh) 60,000 4,992 5,660 10,651

Syst.(Infra) 2 24,273 0 24,273 Syst.(Infra) 0 0 0 0

Total$ 103,885 506,700 610,585 Total$ 171,194 110,166 281,360

Rate $5.20 $25.38 $30.58 Rate $42.80 $27.54 $70.34


Qty Dollars


Salaries 60,000 0 60,000

Fring.Benfit 24,000 0 24,000

Supplies 1,000 50,000 51,000

Deprection 70,000 0 70,000

Electricity


Qty Dollars


Salaries 50,000 180,000 230,000

Fring.Benfit 20,000 72,000 92,000



Electricity


Qty Dollars


Salaries 130,000 0 130,000

Fring.Benfit 52,000 0 52,000

Supplies 300 0 300

Deprection 20,000 0 20,000

Electricity 0 0 0


Qty Dollars


Salaries 40,000 0 40,000

Fring.Benfit 16,000 0 16,000

Supplies 300 0 300

Deprection 50,000 0 50,000

Electricity 0 0 0

Util. & Fac. - Kwh: 233000

Qty Dollars


Salaries 0 0 0

Fring.Benfit 0 0 0

Supplies 300 700 1,000

Deprection 10,000 0 10,000


No Pane

Better Beat

Burn Away

Relief

No Pane

Better Beat

Burn Away

Relief


Qty Dollars


Salaries 60,000 0 60,000

Fring.Benfit 24,000 0 24,000

Supplies 1,000 50,000 51,000

Deprection 70,000 0 70,000

Electricity

Secondary

Maint(Labr) 1,000 10,479 22,557 33,036

Fac(SqFt) 3,000 5,767 0 5,767

Fac(Kwh) 0 0 0 0

Syst.(Infra) 2 24,273 0 24,273

Total$ 195,519 72,557 268,076

Rate $1.30 $0.48 $1.79


Qty Dollars


Salaries 50,000 180,000 230,000

Fring.Benfit 20,000 72,000 92,000



Electricity

Secondary

Maint(Labr) 0 0 0 0

Fac(SqFt) 5,000 9,611 0 9,611

Fac(Kwh) 7,000 582 660 1,243

Syst.(Infra) 3 36,410 0 36,410

Total$ 117,704 253,360 371,064

Rate $10.48 $22.56 $33.04


Qty Dollars


Salaries 130,000 0 130,000

Fring.Benfit 52,000 0 52,000

Supplies 300 0 300

Deprection 20,000 0 20,000

Electricity 0 0 0

Secondary

Maint(Labr) 0 0 0 0

Fac(SqFt) 2,000 3,845 0 3,845

Fac(Kwh) 1,000 178 0 178

Syst.(Infra) 10 121,366 0 121,366

Total$ 327,688 0 327,688

Rate $12,137 $0.00 $12,137

Util. & Fac. - Kwh: 233000

Qty Dollars


Salaries 0 0 0

Fring.Benfit 0 0 0

Supplies 300 700 1,000

Deprection 10,000 0 10,000


Secondary

Maint(Labr) 500 5,240 11,279 16,518

Fac(SqFt) 2,000 3,845 0 3,845

Fac(Kwh) 0 0 0 0

Syst.(Infra) 0 0 0 0

Total$ 19,384 21,979 41,363

Rate $0.08 $0.09 $0.18


Qty Dollars


Salaries 40,000 0 40,000

Fring.Benfit 16,000 0 16,000

Supplies 300 0 300

Deprection 50,000 0 50,000

Electricity 0 0 0

Secondary

Maint(Labr) 1,832 60,523 0 60,523

Fac(SqFt) 2,000 3,845 0 3,845

Fac(Kwh) 5,000 416 0 416

Syst.(Infra) 0 0 0 0

Total$ 171,083 0 171,083

Rate $1.92 $0.00 $1.92

Decision

• Should you outsource maintenance for

$30/hr?


Decision

• What recurring costs will change with a new

packaging machine investment?


Decision

• What’s the impact of Distribution on Product

Cost?


Other RCA Solutions &Techniques

• Product Costs & other final managerial

objectives

• Attributable Costs – Resources w/Weak or

No Causal Relationship to a final output

• Use of Process or Activity Measures

• Depreciation – Replacement Cost

• Capacity Denominators

– Theoretical for Fixed Costs

– Planned for Proportional


Other RCA Solutions &Techniques

• Sustaining RCA

– Imputing quantity and cost with standards

• Confusing variable w/avoidable & fixed

w/unavoidable

– Avoiding the Blended Cost Concept Error


53

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

54

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

55

www.RCAInstitute.org

[email protected]

757 288 6082

http://www.rcainstitute.org/

mailto:[email protected]

Catalytic Reduction Systems

• Link Operational Metrics to Finance

– Real time dashboard of key KPI’s allowed for quicker

reaction to operations performance issues

– Focus is on KPI’s that are financial drivers

– Drill down to financial detail

– Simulate financial impact of changes to operational

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.

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.

Catalytic Reduction Systems


Customer Perspective Learning & Growth Financial Perspective Internal Processes Home

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

Detail


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)

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

Product Composition Production


Managers can simulate the impact of future

decisions using (+/- icons). Very helpful in

forecasting.

63

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

64

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

65

www.RCAInstitute.org

[email protected]

757 288 6082

http://www.rcainstitute.org/

mailto:[email protected]

66

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.

67

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

68

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

Resource Consumption Accounting DetailedMarginal Marginal Insights Costing Continuum/Levels of...

Documents

Transcript of Resource Consumption Accounting DetailedMarginal Marginal Insights Costing Continuum/Levels of...