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Back to Basics in Management

Resource Consumption

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

U.S. Coast Guard

RCA: Resource Consumption Accounting

Traditional Cost Management

RCA: Resource Consumption Accounting

What is Management Accounting?
• Allocating Cost for Inventory Valuation?
• Determining product or service cost for price setting?

Decision Support, Planning, & Control

over the Value Creating Operations
Enterprise Optimization

RCA: Resource Consumption Accounting

What is Enterprise Optimization?
• Maximum Revenue or Mission Outcome
• Minimum Cost

Inputs Decisions Outcomes

Resources Information Enterprise Strategic

Processes Objectives
Leadership Approach
RCA: Resource Consumption Accounting
What is the source of costs in an
• Products or Services
• Overhead
• Processes or Activities

Resources cause costs!

RCA: Resource Consumption Accounting
Characteristics of Resources?
• Capabilities
• Capacity
• Cost Structure

Characteristics of Costs?
• Fixed or Proportional (Variable)
• Attributable to a Resource
• Original Characteristic Change as they are used
by an organization’s processes.
RCA: Resource Consumption Accounting
Confusion About the Nature of Cost
“Product costs are almost all variable
costs….variable costs of manufacturing and
marketing should provide a much better basis for
managerial decisions….” (Kaplan & Cooper, p. 27,
Management Accounting, April 1988).

“In most organizations, the only variable costs…are

the material costs associated with the incremental
order….For most service organizations, the
variable costs…are even lower, perhaps close to
zero.” (Kaplan & Cooper, p. 119, Cost & Effect,
RCA: Resource Consumption Accounting
Economic Decisions
• How often do you start a completely new
• Don’t you usually use some of your existing
resource capacity and capability?
• Most decisions are incremental
– A little more or a little less
– This places a premium on identifying costs
relevant to the decision
– What resource consumption did the decision
RCA: Resource Consumption Accounting
Break Even
$ CM



• Adding Resources, adds Productive Capacity

• Break Even = Fixed Costs
Contribution Margin
• Break Even = Fixed Costs
Revenue – Variable Costs
RCA: Resource Consumption Accounting
Traditional Cost Management
“In the game of business
…[accountants] aspired to be
players, or at least umpires, but
were relegated to the humble
office of scorekeepers. Their
revenge for this ignominy was to
keep the score in such a way that
neither the players nor the
umpires could ascertain the state
of the game.”
R.G.A. Boland. Quoted in the
Financial Times June 14, 2003

RCA: Resource Consumption Accounting

Income Statement vs.
Multiple Margin P&L
+Revenue +Revenue
-Cost of Goods Sold -Product Variable Cost
=Gross Margin = Contribution Margin
-G&A -Product Fixed Cost
-Depreciation = Gross Margin
-Interest -Non-Product Variable Costs
= Net Income before Tax =Margin 3
-Taxes -Non-Product Fixed Cost
=Net Income =Margin 4
-Business Sustaining Costs
=Margin 5
RCA: Resource Consumption Accounting
Are Fixed and Variable Costs
Important in Government?
• Does your activity generate revenue?
– Direct application
• Are you subject to budget cuts? Fallout
funding at the end of a fiscal year?
– You had better know how to shape your
capacity and cost structure.
• Are you subject to increases or decreases
in demand for your services?

RCA: Resource Consumption Accounting

What is Resource

RCA: Resource Consumption Accounting

4 Stages of Cost Management &
Performance Measurement Systems*

• Stage 1 - Inadequate for Financial reporting

• Stage 2 - Financial-reporting driven
• Stage 3 - Standalone (currently dominant stage of ABC)

• Stage 4 - Integrated cost management, financial

reporting and performance measurement

We need to get to stage 4!!!

*Kaplan, R. S. & Cooper, R. (1997). Cost and Effect, Harvard Business School Press: Boston, MA.

RCA: Resource Consumption Accounting

What is Resource Consumption
• RCA inherits core principles from a German
Cost Management Approach (GPK)
Capacity Process
– GPK is a well developed Standard Costing Analysis and Analysis and
System Management Management
– Principles applied in practice since the late RCA
– Principles implemented by 3,000+ companies

• RCA integrates
– Activity-based Costing and Throughput Resource Process view
Concepts view

• RCA creates an integrated economic model GPK ABC

of operations for decision making
– Enterprise Optimization Capacity- Activity-
Focused Focused
RCA: Resource Consumption Accounting
RCA: The Fundamental Difference
Operational Integration
• Breaking the “Tapestry Syndrome”
• Stop trying to get management accounting information
from the financial accounting general ledger

RCA: Resource Consumption Accounting

What is Resource Consumption
Principle 1: Focus on resources & their consumption
• Understand your resources & their consumption, understand cost
• Provides a framework for capacity management

Principle 2: Quantity structure for resource consumption

• Operations drive costs
• Model the operation & use of resources, then apply cost
• Enables resource capacity management

Principle 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

RCA: Resource Consumption Accounting

RCA Storyboard
S: Ancillary S: Plant
Production Engineering and S: Administration
Equipment Maintenance Human
Resources &
Accounting Perform
RP: Dryer RP: Chiller RP: Plant
(Hours) (Hours) Maintenance RP: Admin Labor
Capacity: 100 Capacity: 50,000 (Maint. Labor) (Labor hours) Perform
Output Qty: Output Qty: Capacity: 30,000 Capacity: 17,000
100 50,000 Output Qty: 30,000 Output Qty: 17,000 Accounting


P: Extrusion
S: Quality
Line Legend
RP: QA Labor Testing P- Production
RP: Extrusion RP: Extrusion Machine1 (Labor hours)
Labor (Machine hours) Capacity: 14,000
(Labor hours) Capacity; 17,520 Output Qty: 14,000 Product
Capacity; 32,000 Output Qty: 10,000 Returns Department
Output Qty: 30,000

Manufacturing Costs
Resource Pool
Product Support Cost Abbreviated RP

Budgeted Products

Common Fixed Costs

Product P & L’s

RCA: Resource Consumption Accounting

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

Primary Costs Fixed Proportional

Technician Wages $ - $ 600,000

Supervisor Salary $ 48,000 $ -

General Material $ 855 $ 100,000

Depreciation: Shop Equipment $ 50,000 $ -

$ 98,855 $ 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 20 0 $ 1,000 $ -

Purchase: Gen Materials # PO's 10 200 $ 200 $ 4,000

$ 7,200 $ 28,000

Total Resource Pool Costs $ 106,055 $ 728,000

RCA: Resource Consumption Accounting
Unit Cost Rates (/20,000 Hrs) 5.30 36.40
For Enterprise Optimization RCA provides

• Operational view of organization

• Fixed and variable 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
• Forecasting and simulation
RCA: Resource Consumption Accounting
Case Studies
• Manufacturer of specialty films, extrusion coatings, and laminations
– Part of a $800 mil conglomerate
– Operations in North & South America, Germany and Eastern Europe
– Examined plant produces 200 products in 60 product families

• Outpatient Surgery Center

– Part of a larger regional hospital with medical centers in several locations
– Distinguished Hospital for Clinical Excellence, top 5% hospital for quality of care,
patient safety
– Among an elite group of only 14 teaching hospitals in the nation

• Global semi-conductor business

– Low-tech, hi-tech company
– +/- 25 Billion low tech chips per year
– Operations in North America, Asia and Europe

• Medical Sciences University

– $1 Billion budget, 9000 employees
– 2,500 students in Education, Patient Care, Research and Outreach
– Funded by payments for clinical services, grants and contracts, philanthropy,
tuitions and fees
RCA: Resource Consumption Accounting
Benefits of RCA
• More accurate cost assignment through properly attributing
costs to specific processes and/or outputs based on
• Product costs assigned include only the cost of resources used
• Eliminates costs previously assigned based on unrelated changes to
other products
• A better understanding of resource consumption patterns
and relevant costs
• Capacity analysis is facilitated.
• The amount of excess/idle capacity is made available to managers based
on unconsumed capacity
• The planning cycle is simplified by using RCA reverse flows
to model relationships
• Managers can easily use the underlying information to
support incremental decision making given cost rollup at
various levels
• Proper recognition of the nature of consumption and cost behavior
improves decisions
RCA: Resource Consumption Accounting
RCA Integration Diagram

Capacity Analysis Process Analysis

and Management and Management


Resource view Process view

Advantages Advantages

Capacity-Focused Activity-Focused
RCA: Resource Consumption Accounting
RCA: What’s Next?
• Bibliography of RCA Publications
• Resource Consumption Accounting Institute
– Training with a major university
– Certification for RCA Practice & Software
– Support for RCA Adopters
• Implementation Reviews
• Reviews of organizational practice & use

RCA: Resource Consumption Accounting