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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.
What's On
CMA in the NEWS… from the PNG Post-Courier Wednesday, 24 December 2003
The Government’s two top finance managers have been accorded high international recognition for their academic and professional achievements. Secretary for Finance Thaddeus Kambanei and his deputy Gabriel Yer were recently awarded foundation membership of the Australian Institute of Certified Management Accountants (ICMA), a highly reputable award equivalent to being made a fellow of the British system.
The Australian ICMA executive council at a meeting unanimously resolved to award the membership to the two Papua New Guineans. It also agreed to appoint Mr Kambanei as the first national president of the ICMA (PNG) branch and a member of the Australian ICMA executive council. He is already a member of the Certified Practicing Accountants of Australia (CPAA) making this his second Australian award. The awards were announced by Professor Janek Ratnatunga, a pioneer member of the ICMA and chairman in business accounting at the Department of Accounting and Finance, Monash University, Australia.
Mr Kambanei, 43, from East Sepik Province, holds a Bachelor of Commerce degree from James Cook University, Queensland and a Master of Accounting from the University of Canberra. Mr Yer, 39, from Chimbu Province, holds a Bachelor of Commerce degree in Accounting from the University of Victoria, Melbourne.
When making its decision, the ICMA Council resolved to recognise the officers’ academic records and achievements, and their high level of professional contribution in the field of accounting in PNG. The Finance Department under Mr Kambanei’s management has been instrumental in instituting financial accountability, discipline and audit efficiency in the Government financial system. “It has also entered into a highly successful arrangement with the PNG Institute of Public Administration to conduct professional training course for officers of the department as part of their capacity building process,” Mr Kambanei said. Papua New Guinea has in place an accounting body, the Certified Practicing Accountants of PNG (formerly the PNG Institute of Accountants) that undertakes the role of overseeing the financial accounting.
Events
March 2004:
ICMA-ARIMA Breakfast
Naval & Military Club, Melbourne
March 12-14 and 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 (Tentative)
Advanced Management Accounting & Advanced Strategic Management Accounting, 7-day Seminar in the Philippines
Conducted by Business Sense Inc. and ICMA
June (Tentative)
Advanced Management Accounting & Advanced Strategic Management Accounting 7-day Seminar in India
Conducted by First Canvas and ICMA
Book Shelf
In the US, the Sarbanes-Oxley Act of 2002 has been a talking point. Dubbing it “the most significant accounting legislation since 1933”, Jacqueline Burke and Jill D’Aquila (“A Crucial Test for New CPAs” in The CPA Journal, January, 2004) consider the implications for accounting education and examinations: “We need to teach ethics, emphasise it on the national exam, and include it in the licensing process.” However, another article in that issue raises a broader issue, more relevant to management accountants considering their connection (or otherwise) to the accounting profession: “The growing public distrust of audited financial statements should give (us) pause. … Are financial statements no longer relevant?” (Bruce Nearon “Intangible Assets: Framing the Debate”).
Articles in the Winter 2004 issue of MIT Sloan Management Review give us some indication of the changing work of those trying to add value to a firm, including management accountants. “The Benefits of Managing for Value” (p.8) reminds us that “management’s real responsibility is to create – not preserve – long-term value”. “Principles of the Master Cyclist” (P. Navarro, p.20) argues that executives need to cultivate financial market and business cycle literacy.
Thought provoking articles in that issue include “Transformational Outsourcing” (Jane Linder, p. 52) which suggests that outsourcing can be more than a tool for cutting costs but can also be a means of acquiring new capabilities and bringing about fundamental strategic and cultural change. Another provocative article is “Managing Organisational Forgetting” (de Holan et al., p. 45): a current buzzword, knowledge management, is a process for learning and retaining what is important, but it can also be useful to think of avoiding or “unlearning” what is not.
Please feel free to share anything that you have found interesting. You can send your ideas to: Bill Richardson, Dept of Accounting & Finance, Monash University, PO Box 197, Caulfield East VIC 3145.
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