Resource Consumption Accounting:
The Next Generation of Cost Management Systems

The environment that organizations operate in is increasingly dynamic and complicated. Changes in technology, competition, politics, etc. occur frequently. As a result, organizations need a cost management system that reflects these changes in a timely manner.

Organizations react to an environment that is increasingly complex by becoming more complex. As organizations 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, organizations need a cost management system that comprehensively models this complexity and the interrelationships involved.

Resource Consumption Accounting (RCA) is a dynamic, integrated, and comprehensive cost management system. RCA combines German cost management principles with activity based costing (ABC). This combination involves features that achieve a significant improvement over other cost management systems.

RCA 

RCA is dynamic in that changes in the environment are reflected in the cost model in a timely manner. RCA is integrated with all relevant organization 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 organization 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.

 Three Pillars of RCA

 RCA 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.

First, RCA is fundamentally resource focused; yet it is comprehensive in scope. 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 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 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.

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.

RCA accounting requires resource-to-activity cost assignment but uses simultaneous allocation mechanisms to do so. This technique accounts for nonreciprocal and reciprocal resource-to-resource and resource-to-activity interrelationships.

Second, RCA uses quantifiable output measures for resource pools. RCA decouples 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. As stated by Sedgley and Jackiw (2001, 11), “Dollars, therefore, do not feature in the relationship definition; they merely serve to value quantities once the relationship has been defined.” Moreover, “A cost model that utilizes the quantity-based method to express the complete flow of the relationship…is referred to as a quantity structure.” (Sedgley and Jackiw 2001, 15).

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.

Third, 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 organizational choices determine whether costs are fixed or proportional when they are initially incurred.

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.

Capacity Management and Costing in RCA

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 both 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 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:

1.      Establish resource pool-level unit standards for resources.

2. Establish resource output consumption unit standards for consumers.

3.      Determine planned resource output demand.

4. Convert planned resource output demand into monetary      equivalents.

These four steps are the reverse of costing output and RCA software takes this into consideration. Therefore, the same software can be used for both output costing and budgeting.

Conclusion

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.

REFERENCES

Sedgley, D. J. and C. F. Jackiw. (2001) The 123s of ABC in SAP. John Wiley & Sons, Inc.: New York, NY.

Please address inquires to: David E. Keys
Department of Accountancy
Wirtz 154
Northern Illinois University
DeKalb, Illinois  60115
(815) 753-1538 office
(815) 753-8515 FAX
dkeys@niu.edu