On Target | JAMAR 

In this Feb 2004 issue of On Target :

• Resource Consumption Accounting

• What's On

• Bookshelf

On Target presents another series of Snapshots on a particular theme that will run over many issues.….

Resource Consumption Accounting :

The Next Generation of Cost Management Systems?
The environment that organisations operate in is increasingly dynamic and complex. Organisations react to an environment that is increasingly complex by becoming even more complex. As organisations grow they hire more employees, increase workforce diversity, sell more products/services, acquire more resources and use more activities. Interrelationships among resources and activities become more complicated. Accordingly, organisations need a cost management system that comprehensively models this complexity and the interrelationships involved.

Management accounting of the last two decades has dealt with complexity by focusing primarily on activity-based methods, commonly referred to as ABC, as the basis for improved cost accounting, management and budgeting in the complex and continually changing business environment. These methods have become more widespread in the business world as the power of technology has enabled companies to model their organisations and better understand the nature and drivers of their product and service costs.

This period has also introduced the enabling technology of Enterprise Resource Planning (ERP) systems such as SAP R/3. These systems integrate the stand-alone data models with actual operations and provide an analytical discipline for evaluating information for management decision-making. Information accuracy, timeliness, and quality are the primary benefits. The linking of process-based EPR systems and Cost Management systems has been called Resource Consumption Accounting or RCA.

Three Pillars of RCA

The RCA technique is based on three central concepts or “pillars” that provide important benefits.

The three pillars include specific perspectives regarding resources, the use of a quantity-based approach, and the nature of costs. There are several facets or dimensions to each of these three central concepts.

The first pillar is that RCA is fundamentally resource focused. Resource pools in RCA include all resources (including costs to serve resources). RCA recognizes that some resources exist to serve other resources. Thus, their cost should be assigned to those resources. This assigning is very similar to the allocation of service cost centre costs when such centres service each other, i.e. the cafeteria services the HR function by providing food, and HR services the cafeteria personnel in terms of recruitment advice. RCA accounting requires resource-to-activity cost assignment but uses simultaneous allocation mechanisms to do so. Thus the RCA technique accounts for nonreciprocal and reciprocal resource-to-resource and resource-to-activity interrelationships. This requirement of RCA results in fully costed resources.

Drivers are identified for all resource pool-to-consumer relationships (including both activities and other resource pools as consumers of those resources). This requirement strives to achieve a cause-and-effect relation to properly reflect operational costs in cost assignment.

The resource focus in RCA makes specific requirements in terms of for accounting for capacity. These requirements include :

• defining and managing capacity where it resides—on the resource,

• making excess/idle capacity visible through full disclosure, but not arbitrarily allocating it to products or other cost objects, and

• consistent use of a capacity-supplied concept (e.g., theoretical or practical capacity) for denominator volume.

The second pillar is that RCA uses quantifiable output measures for resource pools. RCA de-couples dollar or cost value relationships from the relationships defining resource consumption. RCA measures all resource outputs in quantifiable units rather than dollars. Only then are the cost assignments made to resource quantities.

This decoupling of the output quantification process from the dollar valuation process provides a consistent perspective regarding the understanding of resource consumption versus application of cost. Hence its supporters say it’s a technique that goes beyond mere cost allocation.

The quantity-based approach of RCA provides an unambiguous distinction between the consumption of resources and the assignment of costs. Distinguishing these pieces can facilitate variance analysis by separating consumption quantity versus value. Continuous data tracking of actual consumption only requires accounting for quantities defined in the relationship. Capacity analysis is facilitated since resource costs are assigned only when used.

The third pillar is that RCA recognizes two important dimensions of the nature of costs.

The first dimension is the initial/inherent nature of costs in that they are either fixed or proportional in their resource consumption patterns. Strategy and organisational choices determine whether costs are fixed or proportional when they are initially incurred. In ABC all cost are considered variable in the long-run.

The second dimension is that the potential nature of proportional costs may change at the point of resource consumption. Resources supplied in a proportional manner can be consumed in a pattern consistent with fixed cost treatment. Thus, the method of cost assignment should treat proportional costs as either proportional or fixed as consumption patterns dictate. In contrast, the inherent nature of a fixed cost does not change with consumption patterns.

This article was adopted from a discussion in the Focus Magazine.
In the next issue of ON TARGET, the issues relating to Capacity Management and Costing in RCA will be discussed.

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