RESOURCE CONSUMPTION ACCOUNTING

SRIHARSHA SANAPALA SESHAGIRI VENKATACHALAM

(ADVANCED ACCOUNTING & CONTROLLING ) R.FISCHER BCM’09

AGENDA

• Conventional Accounting Method• Example : Conventional Accounting Method• Resource Consumption Accounting – What is it?• 3 Pillars of RCA• Case Study – Clopay Case• Conclusion

CONVENTIONAL COST ACCOUNTING

• Arbitrarily Apportion Overhead to Cost objects

• Overhead Apportioned according to some basis

• Overhead absorbed to Products – labor hrs, Machine hrs

• Assumption : Relation between Overhead & Volume Measure

DEPARTMENTALIZATION• Process of dividing the factory into number of segments

• Process of allocating & apportioning Product Overheads to different departments or cost centers ( products & service )

P1 P2 P3 S1 S2

Production Departments Service Departments

Factory overheads ( Allocation and Apportionment )

CONVENTIONAL COST ACCOUNTING IN AN ORGANIZATION

• Two Products A & B• Product A

1 hr of direct Labor Direct Labor Cost : 1 hr * 20 € = 20 €

Production = 100 units

• Product B2 Hrs of direct LaborDirect Labor Cost :2 Hrs* 20 €= 40 €Production = 950 units

• Total Overhead = 100,000 €• Total Direct Labor=2000 hrs• OH Rate/hr = 50 €/hr• Product A : 1 hr of Direct

Labor• Product B : 2 hrs of direct

Labor• Overhead Allocation: • Product A: 50 € per unit• Product B: 100 € per unit

COVENTIONAL ACCOUNTING METHOD

What is noticeable in the distribution of cost?

This practice may lead to over or under absorptionUnder Absorption – Under Pricing ProductOver Absorption – Over Pricing Product

CONVENTIONAL COST ACCOUNTING

• “In the game of business …[accountants] aspired to be players, or at least umpires, but were relegated to the humble office of scorekeepers. Their revenge for this ignominy was to keep the score in such a way that neither the players nor the umpires could ascertain the state of the game.” -R.G.A. Boland. Quoted in the Financial Times June 14, 2003

RESOURCE CONSUMPTION ACCOUNTING (RCA)

• RCA – emerged in 2000 as Management Accounting Approach.

• Developed at CAM-I( Consortium of Advanced Management, International)

• Combines 2 key concepts.(GPK & ABC)• 3 Pillars of RCA.NEED FOR RCA:• Better product pricing , better revenue in a

dynamic business world.

WHAT IS RESOURCE CONSUMPTION ACCOUNTING?

• RCA inherits core principles from a German Cost Management Approach GPK)– GPK is a well developed Standard Costing System

– Principles applied in practice since the late 1940’s

– Principles implemented by 3,000+ companies

• RCA integrates–Activity-based Costing and GPK

• RCA creates an integrated economic model of operations for decision making–Enterprise Optimization

Capacity Analysis Process Analysis & & Management Management

Capacity Focused Activity Focused

Resource View Advantages

Process View Advantages

GPK ABC

RCA

RCA

WHAT IS THE SOURCE OF COSTS IN AN ORGANIZATION?ProductsOverheadProcesses or Activities

Resources Cause Costs!!!

• CHARACTERISITICS OF COSTS:

• Fixed or Proportional• Attributable to a resource• Original Characteristics

change as they are used by an organization’s processes.

3 PILLARS OF RCAPrinciple 1: Focus on resources & their consumption• Understand your resources & their consumption, understand

cost• Resources are changeable with respect to costs.Principle 2: Quantity structure for Resource Consumption• Assignment of Quantifiable units rather than dollars• Model the operation & use of resources, then apply cost• Enables resource capacity managementPrinciple 3: Recognizing the inherent and changing nature of costs• Resource pools start with an inherent cost structure• As Resources are consumed, the nature of their costs change• Costs that are initially proportional by nature can change from

proportional to fixed based on consumption patterns

CASE STUDY – CLOPAY CASE• Clopay Plastics – Leading Manufacturer of

Specialty films , Extrusion coatings and Laminations.

• Headquartered in Cincinnati, Ohio• Case study conducted in Augusta Plant, KY.• KY plant production= 200 products in 60 product

families.

PRODUCTION DEPARTMENTS5 EXTRUSION DEPARTMENTS 1 CONVERTING DEPT – 2 SHEET CUTTERS, 1

REWINDER & 1 PERFORATOR

SUPPORT DEPARTMENTS

MATERIALS MANAGEMENT

ADMINISTRATIONMAINTENANCE

SHIPPINGQUALITY

Pre-RCA Issues:

• Costs changed for individual products based on unrelated changes to other products.

• Products that were manufactured on newer (but equally or more capable) machines often received greater cost allocations even if the products were very similar.

• Managers lowered selling prices (nonstrategic) to increase volume in an effort to decrease allocated cost per

unit to make the product more profitable on a per-unit basis.

• Resource planning was impeded by the inability to simulate relevant cost results given the current system.

RCA RESULTS

• The largest difference noticed between the pre and Post-RCA systems was due to the differing cost assignment logic.

• The cost-assignment logic element that accounted for the largest pre- and post-RCA results difference was the recognition of causal relations between support department costs and their consuming objects.

• RCA identified a greater amount of proportional cost relationships that the prior system treated as fixed.

CONCLUSION

• As companies attempt to adapt to increasing operating complexity, it becomes necessary for them to implement a cost management system that models the complexity and the inter-relationships that are involved.

• Resource Consumption Accounting can effectively provide a remedy for outdated costing systems which have been used in the past.

• Resource Consumption Accounting enables effective organization control by providing accurate performance measures of cost data.

REFERENCES

• http://findarticles.com/p/articles/mi_m0OOL/is_1_6/ai_n11832734/?tag=content;col1

• http://www.rcainstitute.org/• http://en.wikipedia.org/wiki/Grenzplankosten

rechnung• http://www.agavapen.org/files/White.RCA-Re

source_Consumption_Accounting.pdf• http://www.antiessays.com/free-essays/1347

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