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In this Jun 2004 issue of On Target :
Resource Consumption Accounting part 3
2004-2005 Annual Subscription Notice
What's On
Bookshelf
RCA and ABC: Is there a Difference?
There is no question that activity-based methods are able to contribute much to an organisation's ability to understand internal processes: i.e. what work is being done and how much it costs to do it. However, as stand-alone ABC models are not usually integrated with the day-to-day process systems in most organisations, these models seem to be best suited for beginning fact-finding and general data analysis efforts.
Instead, the supporters of RCA claim that their methods, when used in conjunction with ERP systems, offer the promise of accurate, timely, and quality information for business management and decision-making as they are very much linked to business processes. At the same time, the claim is made that they may relieve the administrative burden that legacy, stand-alone ABC systems often impose on the day-to-day work of business.
Resource Consumption Accounting (RCA) is proposed as a dynamic, integrated, and comprehensive cost management system that combines German cost management principles with activity based costing (ABC). The proponents of RCA claim that this combination involves features that achieve a significant improvement over other cost management systems.
RCA is certainly dynamic in that changes in the environment are reflected in the cost model in a timely manner. RCA is integrated with all relevant organisation systems. RCA is comprehensive in that it focuses on resources but readily includes ABC, ABM, variable costing, absorption costing, actual costs, standard costs (set in a formal process), a complete set of segmented income statements, activity based resource planning, primary costs, secondary costs and more.
RCA is an approach that allows the integration of cost management methods that have often been applied in isolation. RCA uses a comprehensive approach to management accounting information systems. RCA is typically applied as part of an enterprise resource planning (ERP) system effort to achieve the best combination of cost management principles implemented in an integrated fashion.
Application of RCA
RCA can be used with at least three different approaches. First, an RCA system can be used. Second, RCA principles can be implemented incrementally. Third, RCA principles can be used subjectively without any changes in the cost management system. Although RCA was designed to be implemented in a comprehensive manner, some consultants have reported success with limited application of RCA principles to improve performance in select areas.
The use of these three approaches of implementing RCA should be considered if an organisation has any of the following problems :
unpredicted wasted resources (e.g., actual excess/idle capacity) or an inability to forecast resource-to-resource needs and resource utilization (e.g., planned excess/idle capacity),
complaints by product and service-line managers of over-costing due to unfair inclusion of idle capacity costs not caused by their products or service-lines.
managers, working with an inconsistent view of the nature of cost, encountering the output-side fixed-cost-death-spiral when they make profit optimization decisions (e.g., product rationalization),
not enough resources or an inability to determine where resources should be deployed (e.g., shifting people and equipment between departments),
undercosting of the actual level of future resource spending (and subsequent process and output costs) due to inadequate consideration of the economic dynamics of fixed, step-fixed, and proportional (variable) costs,
outsourcing decisions not having the desired results (e.g., encountering the input-side fixed-cost-death-spiral with existing information), or
an inability to take appropriate corrective action due to a lack of comparison between plan and actual.
RCA also allows for a process or activity-based focus by defining specific procedures for implementing activity-based costing (ABC). Procedures required are designed to provide a consistent method of ABC implementation that applies sound cost management principles. Currently, there are many different versions of ABC and methods of implementation that can result in significantly different results from one application to another. While embracing the fact that resource consumption is fundamental to cost incurrence, RCA recognizes the benefits of ABC systems that are properly applied.
The main similarity between RCA and activity-based methods is their approach of tracing resource costs to cost objects based on cost drivers, via processes/activities. But in addition, and similar to the CAM-I Capacity Model, RCA adds a capacity component to this cost assignment method. The twist is this: resource capacity is consumed by cost objects according to the quantity demanded and, because capacity is priced, cost follows capacity. Quantities not demanded are not supplied. Capacity is more directly controllable than cost, and therefore, capacity management leads to more effective cost management.
Benefits of an ERP-based, RCA approach over activity-based methods include :
Automating the gathering of actual financial and operational data into a comprehensive, applied business model. The relationships between resources, cost drivers and the cost objects are automatically updated in the course of doing work. In contrast, ABC model relationships are often discerned through subjective interviews and other time-study snapshots. But these relationships are always subject to change in a dynamic business environment and are too complex to maintain in in-house databases.
Structuring the information produced through day-to-day work business model, into standard reporting systems. This keeps the focus on key cost and operational information for running the business and reduces the amount management time committed to spinning the data in a effort to produce useable information.
Providing a forward-looking business model. This is in contrast to activity-based systems, which are generally backward-looking using historical information without recognition of current and future business changes.
Building the business resource requirements based on customer and utility infrastructure demand for services, instead of the resource-suppliers' available supply. Although ABC methods consider the cause and effect relationships between processes and cost resources, they are based on a full absorption approach. In the end they drive all supplied cost through the business, regardless of the actual quantity of resource demanded by service receivers. In contrast, RCA is focused on managing resource capacity as the basis for managing cost, with costs driven by the quantities of capacity demanded.
Recognizing the resource interdependencies between the cost centres themselves and retaining the transparency of the individual cost elements that make up the cost center pools. ABC models are of a step-down nature, from resource to activity to cost object, without recognizing fully-burdened resource costs.
Supporters of the ABC approach claim however, that RCA is very similar to the “bottom up approach” often used in Activity Based Budgeting (ABB) where standards are obtained for expected levels of cost driver incurrence based on activities required via the Material Resource Planning (MRP) systems. These cost drivers are then costed using standard costs per cost driver.
ICMA welcomes members to correspond with regards to the issues raised.
Annual Subscription Notice :
Your membership subscription fee is now due, and you should have received your subscription notice by now. Please forward your 2004-2005 subscription to the Institute by 31 July 2004 for continuation of your membership status. If payment was made before 30 June, you would have qualified for the “early bird” discount. Thank you for your support of your Institute.
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What's On
June 19, 2004
Advanced Management Accounting Exam
Conducted at Telekom Training College
June 26, 2004
Advanced Strategic Management Accounting Exam
Conducted at Telekom Training College
July 2004
Second Intake of the Advanced Management Accounting & Advanced Strategic Management Accounting 7-day Seminar in the Philippines conducted by Business Sense Inc. and ICMA
August 2004
Launch of GMA Conversion Program in Sri Lanka by the Institute of Chartered Accountants of Sri Lanka and ICMA
August 2004
Launch of the Certified Accounting Technician (CAT) program in the Philippines conducted by Business Sense Inc. and ICMA
August 26, 2004
ICMA Annual General Meeting [Date to be confirmed]
Sept 20-28, 2004
Advanced Management Accounting & Advanced Strategic Management Accounting 7-day Seminar in India conducted by First Canvas and ICMA
Book Shelf
Those management accountants currently preparing a careful analysis of potential investment projects will not want to be reminded of the words of Richard Steele and Craig Albright: “even the best-designed systems can be trumped by the power of personality. It has become commonplace for talented and charismatic managers to spin, manipulate and otherwise cajole senior management into funding their business ideas – often in the face of numbers that would, on their own, dictate a negative decision.” In “Games Managers Play at Budget Time”, MIT Sloan Management Review (Spring, 2004), Steele and Albright profile five archetypes of bad behaviour commonly used by managers to subvert decision-making standards. They also explain how senior managers can counteract such behaviour and instill values that lead to better use of investment capital. Could this be the beginning of the end of office politics? I have my doubts.
A couple of recent articles on measuring intangibles. “Demonstrating knowledge value: a broader perspective on metrics” by William Martin (Journal of Intellectual Capital, Vol. 5, Issue 1, 2004) focuses on current efforts to value knowledge in organisations which stem largely from dissatisfaction with traditional accounting methods. Martin argues that new systems are most likely to succeed when they relate to mainstream business activities and operate not so much as metrics as indicators.
The second article “CEVITA: The valuation and reporting of strategic capabilities” by Ratnatunga, Gray and Balachandran (Management Accounting Research, March, 2004) considers the area of strategic decision-making and valuation. On the basis that it is the combination of both tangible and intangible assets that provide the capability that drives economic value, a valuation approach is to calculate the Capability Economic Value of Intangible and Tangible Assets (CEVITA) of an organisation by leveraging its capability-enhancing expenses to economic values by using specific Expense Leveraged Value Indexes (ELVI). Such a valuation is important for internal reporting and may also be appropriate for external financial reports.
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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