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In this Apr 2004 issue of On Target :
Resource Consumption Accounting part 2
JAMAR
What's On
Bookshelf
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!!
What's On
April 2-4, 2004
Advanced Strategic Management Accounting
Monash University [approved as a CMA subject by ICMA]
April 14-16, 2004
Advanced Management Accounting, 3-Day Seminar in Malaysia
Conducted by Telekom Training College and ICMA
April 20-24, 2004
Advanced Strategic Management Accounting, 4-Day Seminar in Malaysia
Conducted by Telekom Training College and ICMA
April 19th 20th and 21st , 2004
Advanced Management Accounting, 3-Day Seminar in Sri Lanka
Conducted by the Institute of Chartered Accountants of Sri Lanka and ICMA
April 26th 27th 29th and 30th 2004
Advanced Strategic Management Accounting, 4-Day Seminar in Sri Lanka
Conducted by the Institute of Chartered Accountants of Sri Lanka and ICMA
May 17-20 and May 24-26, 2004
Advanced Management Accounting & Advanced Strategic Management Accounting 7-day Seminar in the Philippines conducted by Business Sense Inc. and ICMA
July 5-13, 2004
Advanced Management Accounting & Advanced Strategic Management Accounting 7-day Seminar in India conducted by First Canvas and ICMA
Book Shelf
The world has certainly changed when I can prepare this column without even setting foot in the library and leafing through the latest journals – all readings this month were found on my office computer via the web (at least through a library website).
In the Harvard Business Review for March, 2004, Marco Iansiti and Roy Levien “Strategy as Ecology” (pp.68-79) considers “business ecosystems” as networks of organisations and the measures of health for all ecosystems. In particular the article discusses niche strategies and how a business can enhance its narrow domain of expertise.
For the number crunchers among us, a more down-to-earth article in that issue is “A Real-World Way to Manage Real Options” by Tom Copeland and Peter Tufano (pp.90-99). Managers are increasingly applying option theory to support decisions about investment projects and this article presents a valuation model which captures the contingencies of real options and addresses nearly all of the most commonly voiced criticisms of using option theory to manage those contingencies.
Also in that issue is “How’s Your Return on People?” by Laurie Bassi and Daniel McMurrer (p.18) which highlights the importance for companies to invest in employee development and cites research which shows that treating employees as assets boosts returns over the long term. (For the HBR, see www.hbr.org).
In contrast to the idea of investing in people, the problems of workplace bullying and harassment are still too prevalent. “Ways of explaining workplace bullying” in Human Relations (October, 2003, pp. 1213-1232) summarises the literature explaining workplace bullying and focuses on the organisational antecedents of bullying, proposing a model of enabling structures, incentives and precipitating processes. (See www.sagepublications.com).
Considering people as assets of an organisation raises questions of accounting for intangibles – one of those questions which cross financial and management accounting. Issue 4 of the European Accounting Review for 2003 is a special issue reporting the debate among accountants about measuring intangible assets. As the editors of the journal point out: “we strongly believe that intangibles are the major drivers of company growth ... and the challenge of how to manage, measure and visualise them has to be addressed”. Given the scope for manipulating reported earnings presented by intangibles, the possible effects of the International Accounting Standards to be adopted by Australia from January 1, 2005 are also discussed. (See www.eaa-online.org/pub/ear.cfm).
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