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In this Apr 2004 issue of On
Target :
On Target presents another series of Snapshots on a
particular theme that will run over many issues.….
Resource Consumption Accounting:
Capacity Management and Costing in RCA
“Resources are the entities invested in to establish capacity.
The approach in Resource Consumption Accounting is to manage
capacity on the resource."
In the last issue of On Target the three pillars of the
Resource Consumption Accounting (RCA) approach were discussed.
RCA recognizes that resources are fungible (changeable) with
respect to activities and therefore capacity resides on the
resources, not on activities. Excess/idle capacity is reported
as a variance that is highlighted in reporting—but it is never
allocated to individual product units. It may be traced to a
higher group or plant level. Resources supplied minus resources
used equals unused resources or excess/idle capacity.
Emphasis is on making excess/idle (E/I) capacity visible so
that E/I and productive capacity can be managed. RCA assumes
that excess/idle capacity should be attributed to the person or
level responsible for controlling or influencing it. Using a
capacity-supplied concept provides a complete disclosure of the
resources available to management. Thus, the degree to which
capacity has actually been used (when compared to this available
amount) presents a readily visible accounting for unused
resources. Management can then use this information to manage
capacity by relating it to resource acquisition decisions. Tying
responsibility for capacity utilization to resource acquisition
decisions can then be used to promote accountability.
RCA is defined as an operational system. This implies that
the accounting system (or accountants) does not have sole
discretion to determine (i.e., calculate) the operational plan
(i.e., capacity level, production possible, etc.) or the
denominator volume used. What capacity level to use (and how to
define/measure it) is likely to be an issue that should involve
operations and/or engineering personnel working together with
cost management personnel.
Activity Based Resource Planning
The quantity structure combined with recognition of the
inherent nature of costs provides the foundation for not only
product/service costing but also budgeting and planning.
This
budgeting and planning dimension of RCA is called Activity Based
Resource Planning and includes the following four steps :
-
establish resource pool-level unit standards for resources.
-
Establish resource output consumption unit standards for
consumers.
-
determine planned resource output demand.
-
Convert planned resource output demand into monetary
equivalents.
These four steps are the reverse of the top-down approach to
activity based costing, where resources are first described in
monetary cost terms and then the activities and cost drivers are
determined. RCA software takes this difference into
consideration, although it could be said that “bottom-up”
ABC models have a similar approach to RCA. Therefore, the same
software can be used for both output costing and budgeting.
The Claimed Benefits of RCA
The supporters of an ERP-based, RCA approach claim this
technique has the following benefits :
-
Prescribes criteria for cost centre definition, which
provides for better in-sourcing / out-sourcing comparison and
decision-making for utility construction, maintenance,
operations, customer services and internal support services.
-
Packages cost around productive units of work, in order to
identify the units costs of work from high-level metrics to
cost-element detail.
Distinguishes between primary costs within cost centres and
secondary overhead costs as a basis of overhead cost control.
-
Provides reliable information for predictive business planning
and work estimating. This is due to the interrelationship
between Order and Operation demand for capacity quantities as
the driver of the supply of activity quantities of resource.
-
Enables more accurate assignment of asset depreciation and
R&D costs, which are typically significant in utility
project- and program-oriented work.
-
Supports alternative cost analyses depending on the business
purpose, such as business segment profitability or margin
evaluation, rather than simply a traditional utility, FERC-based
view.
-
Clarifies the appropriate use of financial information for
external reporting vs. internal management decision-making,
including the evaluating operational efficiency, tactical
effectiveness, and strategic planning and control.
As companies attempt to adapt to increasing operating
complexity, they need a cost management system that
comprehensively models this complexity and the
interrelationships involved. RCA meets this need and represents
a substantial improvement over other cost management systems.
RCA provides a comprehensive remedy to antiquated, piecemeal
cost systems. Just as many companies are implementing
enterprise-wide (ERP) systems to integrate information, RCA
provides an integrated solution for comprehensive,
enterprise-wide cost management.
This article was adopted from a discussion in the Focus
Magazine.
In the next issue of ON TARGET, a comparison of RCA and ABC will
be made to conclude the series.
JOURNAL OF APPLIED MANAGEMENT ACCOUNTING RESEARCH (JAMAR) on
Website
The Institute’s research journal forms an important link
between theory and practice in modern managerial accounting. The
journal is specifically targeted to “applied” research, and
hence welcomes articles, case studies, software implementations
and surveys that link academic and practitioner interests in the
area of value-creating and decision support information.
Please go to the ICMA webpage, and click on JAMAR. Two issues
are now online. Print versions are also available.
The objective of the Journal is the publication of
substantial and original contributions to knowledge in the areas
of managerial accounting, broadly defined. Articles should be
empirical or analytical; rigorous, yet preferably intelligible
to a wide audience of academics and, where appropriate,
practitioners. All articles are subjected to a double-blind
review process. Presentation should be as elegant and economical
as possible, avoiding unnecessary words, numbers or symbols.
The Journal will be a true internet publication to which
potential contributors will submit papers via the Institute’s
web-page cmawebline.org for review. The editor will initially
review the paper, and if suitable, send it to referees via the
web. The referees’ comments will be received via the web.
A General Guide for Authors is that papers should be as brief
as possible consistent with the journal's objectives. They
should be typed and double-spaced. A copy, in WORD format,
should be submitted electronically. In order to ensure an
anonymous review, authors should not identify themselves
directly or indirectly. A cover page should show the title of
the paper, the author's name, title and affiliation, and any
acknowledgements. The title of the paper, but not the author's
name, should appear on the first page of the text. An Abstract
of 150-250 words should be provided on a separate page
immediately preceding the text. Experience has shown that papers
which have already benefited from critical comment from
colleagues at seminars or at conferences have a much better
chance of acceptance.
Further information is available on the Institute’s
Web-page.
This is your research journal…USE IT!!
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