achieving excellence in cost management – resource ... · variance, capacity measurement, process...
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Achieving Excellence in Cost Management –Resource Consumption Accounting
Larry R. White, CPA,CMA, CFM, CGFM
Director, RCA Institute
www.rcainstitute.org
Speaker Biography
� Larry is the Executive Director of the Resource Consumption Accounting (RCA) Institute. He retired from the US Coast Guard as a Captain with over 28 years of service, 21 years in financial management and accounting. He was Commanding Officer of the CG’s National Finance Center, Deputy CFO of the Coast Guard, and comptroller of 3 major field commands.
� His current professional activities include serving on the Association of Government Accountant’s Professional Certification Board for the CGFM certification, the Board of Directors of the Institute of Management Accountants, the Editorial Advisory Board for Directors of the Institute of Management Accountants, the Editorial Advisory Board for Cost Management magazine, columnist for Automation World, and a the Metrics Strategic Initiative Committee of the Manufacturing Enterprise Systems Association.
� His past service to the accounting profession includes service as a member of International Public Sector Accounting Standards Board of the International Federation of Accountants; Chairman of the Board of the Institute of Management Accountants; a member of the AICPA Members in Government Committee (now GAAC); a member of the AICPA Special Committee on Enhanced Business Reporting; and on the Board of Directors of the Consortium for Advanced Manufacturing -International (CAM-I).
www.rcainstitute.org
Achieving Excellence in Cost Management
� Key to Excellence in Cost Management
� Challenges to Excellence in Cost Management
� Principles for Costing
� Resource Consumption Accounting
Key to Cost Management
� Optimizing the employment of resources.
Simple Process
ResourcePool
Another ResourcePool (s)Or Final
Product/ServiceFixed
OUTPUT
Proportional
5
Organizational Element(Support or Production)
Material/CommodityLabor
EquipmentOperating Budget
MaterialServices
(ReflectingResourcesApplied)
Resource Quantities Drive Monetary Quantities
Frequently a little more complex
Final Output 1
Final Output 2
Resource Pool A
Resource Pool E
Resource Pool B
Final Output 3
Final Output 4
Resource Pool H
Resource Pool F
Resource Pool G
Resource Pool C
Resource Pool D
Resource/Resource Pools
Intermediate Outputs
Operational View Financial View
Processes/Value Streams
Intermediate Outputs
Products/ServicesReal TimeAction OrientedInternally Focused
FR TimeReport Oriented
Externally Focused
RCA Recognition
Activity Based Costing
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Traditional StandardCosting
Challenges to Excellence in Costing
Technical
� General Ledger as a data source
� External Financial Reporting Perspective
� Management Accounting Methodology Confusion
� Cost Benefit/Risk� Cost Benefit/Risk
Knowledge & Skills
� Traditional Standard Costing
� Capacity & Excess Capacity
� Fixed &Variable Costs
� Mixing up Cost Concepts
Consumption Concepts
Operational
Fixed Variable
Decision Support
UnavoidableAvoidable
Opportunity Cost
Fixed Variable UnavoidableAvoidable
“Relevant Range”
Can be Modeled Basis for Action
Divisibility of Resource Information
Costing Principles
� International Federation of Accountants International
Good Practice Guide: Evaluating and Improving Costing
in Organizations
Resource Consumption Accounting Principles� Resource Consumption Accounting Principles
Enterprise Financial Management
Financial Accounting
Cost Measurement
Managerial Accounting
Tax Accounting
Source data capture
(transactions)
Non-financial data capture
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
Value-added to managerial decisionsLower Higher
IFAC Key Principles
� The importance of costing to good financial management
The ability to identify, measure, interpret, and present costs as they relate to an organization’s economic flow of goods and services, both historically and in a forward-looking context is necessary for a informed understanding of the organizational drivers of profit and value.
Fitness for purpose� Fitness for purpose
Cost information should be prepared in a manner appropriate for the specific context and purpose of its use, of which there are three principal applications:
� External reporting – historical and descriptive;
� Performance and Cost Evaluation and Analysis –interpretative and diagnostic;
� Enterprise Planning and Decision Support – analytical and predictive.
LRW Comment: Use of costs calculated for one purpose may be unreliable if used for another purpose.
IFAC Key Principles
� Business model/reality driven
Cost models should be designed and maintained to reflect the cause-and-effect interrelationships and the behavioral dynamics of the way the organization functions. The information needs of decision makers at all levels of an organization should be taken into account, by incorporating an organization’s business and operational models, strategy, structure, and competitive environment.strategy, structure, and competitive environment.
� Materiality/Cost Effectiveness
The design, implementation, and continuous improvement of costing methods, data collection, and systems should reflect a balance between the required level of accuracy and the cost of measurement (i.e., cost benefit tradeoff), based on the competitive situation of the organization.
IFAC Key Principles
� Comparability over time and Consistency
Cost information should be collected and analyzed systematically and in such a way as to ensure comparability over time, whether in a routine information system or for a specific application and/or purpose.purpose.
� Transparency and Auditability
Definitions and sources of cost data, the operational and other non-financial data underpinning them, and the methods of calculation of costs, should be transparent to users and capable of review, risk analysis, and assurance.
Enterprise Financial Management
Financial Accounting
Cost Measurement
Managerial Accounting
Tax Accounting
Source data capture
(transactions)
Non-financial data capture
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
Value-added to managerial decisionsLower Higher
RESOURCES, OPERATIONAL QUANTITIES AND COSTS
MANAGERS’ANALOGOUS ACTIVITIES
CausalityCriterion Analogy
CONCEPTS
Modeling InformationUse
Operational Model Providing
Attributable Cost
Baseline Optimization Information=
Criterion AnalogyCriterion
CONCEPTS
Use
RCA Modeling Principles
� Cause and Effect
� Responsiveness
� Attributability
� Work
Causality
� Optimization Thinking:
� For a Given Outcome Understand the Cause
� For A Decision Alternative Understand the Effect
Cost must reflect the operational resource flows or consumption
to be logical and useful for decision making and control.
Responsiveness
Product A Product BAn Output
Inputs &their $’s Fixed
Inputs
Proportional Inputs
An Output
Inputs &their $’s Fixed
Inputs
Proportional Inputs
Service 1 Service 2 Service 3
An Output
Inputs &their $’s Fixed
Inputs
Proportional Inputs
An Output
Inputs &their $’s Fixed
Inputs
Proportional Inputs
An Output
Inputs &their $’s
Fixed Inputs
Proportional Inputs
Variability Responsiveness
Product A Product B
Service 1 Service 2 Service 3
Product A Product BOutput
Inputs
Output
Inputs
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Service 1 Service 2 Service 3
Total Volume
$’s
Change in Total $’s Due to a Change in
Total Volume
Fixed Cost
Variable Cost
Service 1 Service 2 Service 3
Output
Inputs
Output
Inputs
Output
Inputs
Traditional Principle of Variability: Total Cost to Total Volume
Responsiveness
Attributability
� The principle of attributability assigns costs with a weak causal relationship to specific outputs (common costs) to the operational level responsible to manage them.
� Attributability is the responsiveness of inputs (and hence their costs) to decisions that change the provision and/or consumption
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costs) to decisions that change the provision and/or consumption of resources.
� Attributable Cost – The closest you can come to fully absorbed cost maintaining the principle of causality
RCA Structure for Marginal Costing
Attributability
Quantitative
Definition of Material Causal Relationships
SupportResource Pools
SupportActivities
Primary Resource PoolsPools
Primary Activities
Product/Service Objects
Result Segments -Revenue Responsibility
ExcessCapacityCosts
WorkWithout the Work Principle:
Resource Pool A Product 123
Planned Output: 1,000 Hrs
Actual Output: 1,100 Hrs
Inputs:
Pool A 1,100 Hrs
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Using the Work Principle:
Product 123Inputs:
Resource Pool A
Planned Output: 1,000 Hrs
Actual Output: 1,100 HrsSetups (Qty 10) 300 Hrs
Run Machine 800 Hrs
Setups
Run Machine
Resource Consumption Accounting
� RCA Inherits Core Principles from German Cost Management (GPK)
� Grenzplankostenrechnung (GPK) Translated –Flexible Analytic Cost Planning & Control
� Well Established Standard Costing System� Principles Applied in Practice since the late 1940’s
RCARCA
Capacity Analysis and Management
Process Analysis and Management
25
Principles Applied in Practice since the late 1940’s� 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� Superior Marginal Analytics
Resource view
Advantages
Process view
Advantages
GPK ABC
Capacity-Focused
Activity-Focused
Costing Continuum/Levels of Maturity
Descriptive: Expense Tracking, Cost Reporting and Consumption RatesPredictive: Demand Planning Driven with
Capacity Sensitivity
Process/ Direct cost to
Add indirect
Individual std costs, project &
Push activity-based costing (ABC), Product costs
Level 6 with customer & channel profitability reporting; Cost-to-serve
Unusedcapacitycosts (estimated)
(ABRP); forecast driver quantities X std unit rates, driver-based budgeting
(TDABC); forecast driver quantitiesX 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
26Detailed
Marginal Insights
No Marginal Insight
Marginal Insight Awareness
1Blind
Book-keeping
Nomarginal insights
Process/ lean accounting
2ProcessVisibility
Direct cost to outputs
Limitedprocessmarginal insights
indirect costs
4Output Visibility
Direct costmarginal insights
All outputcostmarginal insights
5Explicit Outputs
Output specific marginal insights
project & job costing
costs
Explicit output marginal insights
6Explicit IndirectCosts
7Customer Demand Sensitive
8Unused Capacity Aware
Add customer & channel marginal insights
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
Increased ability to isolate common fixed costs
Increased ability to isolate common fixed costs
3Output Visibility
RCA Storyboard
S: Ancillary Production Equipment
S: AdministrationHuman Resources
& Accounting
RP: Dryer (Hours)Capacity: 100Output Qty: 100
S: Plant Engineering and
Maintenance
RP: Plant Maintenance (Maint. Labor)Capacity: 30,000Output Qty: 30,000
RP: Chiller (Hours)Capacity: 50,000Output Qty: 50,000 Perfor
m
Accounting
Legend
S-Support
P- Production
RP: Admin Labor(Labor hours)Capacity: 17,000Output Qty: 17,000
Perform
HR
27
Product Support Cost
S: Quality Assurance
P: Extrusion Line
RP: Extrusion Labor (Labor hours)Capacity; 32,000Output Qty: 30,000
Product P & L’s
Department
Resource PoolAbbreviated RP
Activity
Perform
Admin
QA
Testing
Common Costs
Product
Returns
RP: Extrusion Machine1(Machine hours)Capacity; 17,520Output Qty: 10,000
Manufacturing Costs
RP: QA Labor(Labor hours)Capacity: 14,000Output Qty: 14,000
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$ -$
RCA Data Collection
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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 Multi-Level P&L
29
Marginal Costing Requirements
� Incorporate Foundational Economic Principles
1. Provide an accurate rendering of an enterprise’s flow of economic goods and services. � Accommodate the strong
form of causality.
� Segment Information to Enhance Its Relevance to Decision Makers
4. Segment the cost model for only that portion of economic goods and services relevant to the decision at hand. form of causality.
� Accommodate the weak form of causality
2. Link the quantitative flow of goods and services to their monetary implications.
3. Provide insight into input-output behaviors - and their respective costs
to the decision at hand.
5. Reflect all causal relationships and their characteristics relevant to the decision
6. Provide accurate monetary information for all relevant cost categories appropriate to the decision.
Simple Model
Plant MaintenanceCapacity: 240 hrs
Corp Reporting
Corporate Segment
Prop: 2hr/Unit
Fixed: 80 hrs/mth
Fixed: 80 hrs/mth
Safety Training
Plant LaborCapacity: 240 hrs
Raw MaterialCapacity: Unlimited
Product A
Plant SegmentIdle Capacity
Prop: 1 lb/Unit
Prop: 4hr/UnitFixed: 30 hr/mth
Fixed: 80 hrs/mth
Fixed: 80 hrs/mth
Plant Labor
Direct Materials
Capacity240 Hrs
CapacityUnlimited
1 lbs. per unit
4 hrs. per unit
30 hrs. per month
$200$0.83
per unit
$10/lb
Proportional Cost
Fixed Cost
Product P&L
Materials
Proportional Cost
Fixed Cost
xx
xx
xx
Revenue xx
Product Margin xx
Corporate Headquarters
32Adapted from TRIPOD ASSOCIATES LLC 2010
Capacity240 Hrs
2 hrs. per unit
80 hrs. per month
80 hrs. per Month
80 hrs. per month
Plant
Maintenance
Calculated based on production
$300$1.25
per unit
32
Corporate P&L
Plant P&L
Idle Labor
Fixed - Training
xx
xx
Fixed – HQ ReportingFixed – HQ Reporting
xx
Plant Margin xx
Corporate Margin xx
RCA MODEL – Marginal P&LProduct P&L
Materials
Prop Plant Labor
Fixed Plant Labor
200
67
25
Revenue $1000
10
3.33
$50
Prop Maint 50 2.5
Production of 20 units at $50 price per unit
Throughput Margin 800 40
Product Cont. Margin 683 34.17
1.25
Overall Per Unit
Adapted from TRIPOD ASSOCIATES LLC 2010 33
Corporate P&L
Plant P&L
Fixed Plant Labor 25
Idle Plant Labor
Fixed - Training
42
67
Fixed–HQ Reporting 100
Product Gross Margin 558
Plant Margin 400
Corporate Margin 300
27.92
Fixed Maintenance 100
Idle Maintenance 50
1.25
6
Note: figures are rounded
RCA Modeling Example
Service A
Support 1IT
Service
34
Service B
Help Desk
Support 2 Human Res
Service P&L
RCA Modeling Example
Service A
Support 1 IT
Service
Desktop Ticket
Qtys
Qtys
Qtys
35
Service B
Help Desk
Support 2 Human Res
Service P&L
Process Payroll
Qtys
Qtys
Qtys
Qtys
Maintenance Nightmare
� It typically does not make sense to try and periodically (i.e., monthly) capture
all this data and then feed it into the cost model.
� RCA uses the ability to impute standard relationships to significantly reduce
data collection needs.
� Consider the relationship between a machine and the utilities it uses.
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ElectricityMachine Hours
200 Kilowatts per
Machine Hour
Imputing Actual Quantities
� The standard relationship is defined in planning.
� For actual consumption all you have to do is tell the system the actual number
of machine hours worked and the cost model will impute the actual electricity
consumed.
Actual Machine hours
worked: 500. Actual KwH’s
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ElectricityMachine Hours
200 Kilowatts per
Machine Hour
worked: 500. Actual KwH’s
Consumed is 100,000.
Imputing Quantities
� Imputing consumption quantities in RCA can occur for any relationship or any
series of relationships if a standard can be defined.
� Consider a purchasing example.
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PurchasingService A
P.O.Qty: XX
$: YY
15 Min. per P.O.
10 P.O.s
2.5 Hours of Work
Imputing A Series of Quantities
� If one has a standard quantifiable relationship between the P.O.’s and the
Service the only data you would have to provide the RCA model is the number
of Services produced.
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PurchasingThe Service
P.O.Qty: XX
$: YY
15 Min. per P.O.
1 P.O. per Client
Imputing A Series of Quantities
� If one has a standard quantifiable relationship between the P.O.s and the
Service the only data you would have to provide the RCA model is the number
of Services produced.
2.5 Hours
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PurchasingService A
P.O.Qty: XX
$: YY
15 Min. per P.O.
1 P.O. per Client
2.5 Hours of Work 10 P.O.s
Actual Service Output: for 10 Clients
Helpdesk
Output:
Capacity:
5,000
6,000
Utilities
50,000
Password Resets
Application Servers
Output:
Capacity:
15,000
16,000
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Human Res
Output:
Capacity:
NoneOutput:
Capacity:
1,400
1,600
Facilities
Output:
Capacity:
2,000
2,500
Output:
Capacity:
50,000
60,000
2,000
Resets
Application
Output:
Capacity:
5,000
6,000
Relationships - Assumptions
� Assume for the Moment that All Service Outputs Have to be Recorded.
� A Password Reset Requires 3 Minutes of Helpdesk time and 2 Application
Transactions
� Human Resources Process Payroll is a Standard Based on Headcount per Pay
Period.
� But, headcount is not an output on any of the receivers i.e.,
headcount does not feature in consumption relationships directly.
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headcount does not feature in consumption relationships directly.
� All Utilities are Standard Consumptions, This Almost Always the Case.
� All Facilities Space are Standard Consumptions, this is also Almost Always
True.
Helpdesk
Output:
UtilitiesPassword Resets
Application Servers
Output:
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Human Res
Output:
Facilities
Output:
Output: Resets
Application
Output:
Output:
Legend:
Recorded
Imputed
Helpdesk
Output:
Utilities
The Final Model
Password Resets
Application Servers
Output:
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Human Res
Output:
Facilities
Output:
Output: Resets
Application
Output:
Output:
Legend:
Recorded
Imputed
Payroll Processing
HR Module
Characteristics of RCA Cost Model
� Is constructed based on fixed and proportional resource consumption quantities,
which results in an accurate reflection of how resources are used in an
organization.
� Is dynamic in that the model is able to adjust to changes in those consumption
relations.
45
relations.
� Is flexible, the model does not become out of date due to rigid dollar based
allocation relationships that is no longer valid when volumes and/or mix change.
� Requires very low maintenance to keep it current and able to provide
managers with up to date information.
� Does all of the above while providing exceptional marginal information for
decision analysis for all cost objects in the cost model.
� Fully absorbed costs can also be calculated by allocating attributed costs to
product or service.
RCA Institute
� Institute Membership
� Corporate & Individual
� Certification
� Specialist, Practitioner, Master
� Software Products
� Adopter Exploratory Workshops
� Customized Workshops applying RCA to an organization� 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