Resource Consumption Accounting (RCA)
Resource Consumption Accounting
Resource Consumption Accounting (RCA), is a ‘made in the US’ management accounting approach that combines the best of German Grenzplankostenrechnung, referred to as GPK, and the detailed advantages of activity-based accounting approaches. At the 30,000 ft. altitude, RCA addresses the excess/idle capacity gaps that are not accounted for in GPK and adds the necessary resource level that activity-based costing overlooks.
RCA leverages all of the learnings that spans the last century of management accounting practice, and in particular, the lessons learned over the last two decades as to what works and what does not work in the sphere of decision science. Since 2000, Resource Consumption Accounting has evolved beyond its research and validation phase that resulted in a management accounting approach that is now superior in every respect, as it places the emphasis back on its customer and primary user – the manager.
Resource Consumption Accounting has become widely recognized and acknowledged by professional accounting bodies such as IFAC (International Federation of Accountants), FASAB (Federal Accounting Standards Advisory Board), IMA (Institute of Management Accountants) and CAM-I (Consortium of Advanced Management, International). In July 2009, the Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants released its International Good Practice Guidance (IGPG) publication, Evaluating and Improving Costing in Organizations and its companion document Evaluation the Costing Journey: A Costing Levels Continuum Maturity Model. The Costing Levels Maturity Model acknowledges that Resource Consumption Accounting attains the greatest level of accuracy and visibility for managerial accounting information as shown in the costing model - Level #11.
RCA Open Source Application (ROSA)
ROSA, an acronym for RCA Open-Source Application was designed by Alta Via Consulting, LLC to be used as a modeling tool to aid interested parties in better understanding the principles behind Resource Consumption Accounting. It was determined that a hands-on RCA application would be the most effective way to introduce RCA conceptual design concepts. Using open-source software allows accessibility by any web browser with the database(s) being installed either locally or on a central server.
The ROSA Open-source Package contains the following:
- (1) Base Model database, completely configured to portray a manufacturing entity in the health care industry as the example.
- (2) Sample database, already structured but without master data or cost data for building your own model.
- (3) Excel Application files, for the import of master data and key figure data to complete the application.
- (4) ROSA Manual, most current version available on WikiBooks - Link Here. (Note: Manual Revisions currently In Progress).
To access and download the databases, please click here: ROSA Download
Background - Why RCA was developed: Relevance Lost
Johnson and Kaplan pointed out in the mid 1980’s in ‘Relevance Lost’ that US management accounting did not meet the requirements to operate a company. Not much has changed since then according to the following recent surveys.
IMA and Ernest & Young found some 2,000 CFO's and Controllers said:
- 80% - cost management is important to their organizations’ strategic goals
- 98% - cost information is distorted (too many overhead allocations)
The Consortium for Advanced Management, International (CAM-I) - RCA Interest Group survey found:
- 80% - of U.S. companies still use traditional standard costing
- Only 23% were satisfied with decision support information
FAQ's About RCA: Linking Operations and Finance to Drive Business Performance
The following Q&A's were taken from an Alta Via Consulting sponsored webinar titled Resource Consumption Accounting: Linking Operations and Finance to Drive Business Performance originally presented on July 16, 2009 to MESA (Manufacturing Enterprise and Systems Association). Answers were provided courtesy of:
Larry White, Executive Director RCA Institute,
Wolfgang Doeller, Practitioner with macs Controlling, and
Mark Arrieri, Controller US Technical Products for Neenah Paper Munising Mill.
Q. Can the RCA model work for start-up companies, where production numbers are scaling beyond historical number?
A. Larry White (RCA Institute): Yes. RCA is based on modeling operations and resource capacity. The model must change as new capacity is added. Production capacity has ripple effects on support activities and in order to maintain cause and effect relationships, the entire enterprise must be examined. Additionally, RCA uses theoretical capacity; therefore, expanding the use of existing capacity is clearly within the model. The sooner RCA thinking about cost is used in an organization, the more likely you will be able to match it to information systems and your decision making culture.
Q. Can you provide some more examples of ERP software that are flexible enough to incorporate RCA?
A. Larry White (RCA Institute): In the large ERP realm, SAP has inherent RCA capability; however, SAP US does not market or have any expertise in RCA or GPK. In the Best of Breed class, the most solid product I am aware of is macs Controlling.Some ABC software may be capable; however, only macs Controlling has RCA implementations operating. In the business intelligence or OLAP class of software, nearly any product could support a small scale RCA model if one has the time and knowledge to create the templateThe RCA Institute will soon be making a free RCA Template available for a tool called PALO which is a free, open source BI tool.
A. Mark Arrieri (Neenah Paper): The other packages NP inquired about were not as capable as macs.
Q. How do you handle the remaining costs of the support centers if the time available in these support centers is not or can not be fully used by the production centers?
A. Larry White (RCA Institute): The unused support resources would be excess capacity. The cost of that excess capacity would be shown on a P & L at the level (product group, product line, organization, etc) where it was avoidable. The cost would not be automatically allocated to product(s) cost; though clearly at some level product pricing has to consider all the costs of the organization. Excess capacity must be evaluated for its cause and decisions made about whether to continue to incur the cost or make a change to avoid it.
A. Mark Arrieri (Neenah Paper): The remaining cost in support centers should be apparent when reviewing the cost center reports against targeted spending. Upon review, decisions can be made on how to reduce the spending or focus the resources on other more constrained areas.
Q. How is R&D cost for the product taken in account? Fixed cost? What about process enhancements costs from R&D?
A. Larry White (RCA Institute): RCA encourages modeling all costs of the organization that provide support or produce in a cause and effect manner. To that extent an R&D resource center would be modeled much like a production center – with fixed and proportional costs based on the work centers output. The output of that work center would be assigned causally to parts of the organization it supported. Long term R&D may be assigned to the organization as a whole. R&D to design product variations may be assigned to marketing. R&D to improve processes may be assigned to a cost center, product or product group if there is a causal relationship. RCA does not base its definition of fixed and proportional cost on the output of the organization – a product or service. To do this creates as fundamental thinking error known as the Blended Cost Concept Error, where fixed costs are automatically categorized as unavoidable and variable costs are categorized as avoidable. In RCA, Fixed and proportional costs are based only on the output of a resource pool; and cost behavior changes as they move through a value chain. Our focus is on providing correct information on avoidability of costs for any level of decision.
Q. How do you handle 'returned material' that is reworked?
A. Larry White (RCA Institute): Returned material that is reworked would be costed based on the resource pools that work on it when it is returned, assuming it is reworked for sale to another customer. The initial production is a sunk cost. If it is reworked for the same customer, the cost of the rework may be handled as service cost or a rework cost. There are a number of ways to address the situation. The important point is it should be handled in a manner where costs are reflect based on the cause and effect factors of the work done on the returned material. Whether it is treated as a product cost, cost to serve a customer, etc. depends on the nature of the business and operational strategies. It must be handled in manner that supports correct decision making.
A. Wolfgang Doeller (macs Controlling): RCA also depends on the ERP system in place.Usually there is a rework job which reflects the original cost of the material. All resource pools used charge to this job. The job is then credited with the value of good material put into inventory. The balance which is the cost of re-work is charged to the P+L.
A. Mark Arrieri (Neenah Paper): Returned material for reworked is very rare at NP. If product does require rework, whether before or after customer delivery, the rework is costed at those charges through cost centers utilized, however no standard is developed and the costs are charged directly to the income statement.
Q. How do you handle outsource processing costs? There is more to it than the bill from the processor, since there is internal office and Sales and Ops cost to generate and support this work?
A. Larry White (RCA Institute): RCA models all operations and resources – production and support (including administrative activities) as needed, to provide effective cause and effect insight for enterprise optimization. Outsourcing often looks appealing until you understand all the costs to an organization….traditional standard costing focuses primarily on production and production support, and typically misses other support costs.
A. Wolfgang Doeller (macs Controlling): For this purpose we create special cost objects either by product or by vendor in order to assign the cost. In a planning environment a standard surcharge % is designed and added to the cost from the processor. In actual costing the deviation from the standard is shown and analyzed.
RCA Institute
The RCA Institute, is a not-for-profit organization that has been established as a comprehensive online source for information and services related directly to Resource Consumption Accounting (RCA). The RCA Institute’s primary objective is to establish a knowledgeable RCA community and to serve as a dedicated site providing information on the philosophy and theory behind RCA. The RCA Institute seeks to correct the 'relevance lost' in management accounting as stated above by raising the standard of management accounting knowledge and encouraging sound techniques and practices. Please visit www.rcainstitute.org for more details.
RCA in a nutshell:
