Resource Consumption Accounting

RESOURCE CONSUMPTION ACCOUNTING SRIHARSHA SANAPALA SESHAGIRI VENKATACHALAM (ADVANCED ACCOUNTING & CONTROLLING ) R.FISCHER

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 segmentsFactory overheads ( Allocation and Apportionment )

P1

P2

P3

Production Departments

S1

S2

Service Departments

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

CONVENTIONAL COST ACCOUNTING IN AN ORGANIZATION • Two Products A & B • Product A 1 hr of direct Labor

• Total Overhead = 100,000 € • Total Direct Labor=2000 hrs Direct Labor Cost : 1 hr • OH Rate/hr = 50 €/hr * 20 € • Product A : 1 hr of Direct Labor = 20 € Production = 100 • Product B : 2 hrs of units direct Labor • Product B • Overhead Allocation: 2 Hrs of direct Labor • Product A: 50 € per Direct Labor Cost :2 unit Hrs* 20 €

COVENTIONAL ACCOUNTING METHOD What is noticeable in the distribution of cost? This practice may lead to over or under absorption Under Absorption – Under Pricing Product Over 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

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–Activitybased Costing and GPK

Capacity Analysis Process Analysis & & Management Management RCA

Resource View Advantage s

GPK

• RCA creates an integrated economic model of

Process View Advantages

ABC

RCA WHAT IS THE SOURCE OF COSTS IN AN ORGANIZATION? Products Overhead Processes 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 RCA Principle 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 management Principle 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

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.

5 EXTRUSION DEPARTMENTS

PRODUCTION DEPARTMENTS 1 CONVERTING DEPT – 2 SHEET CUTTERS, 1 REWINDER & 1 PERFORATOR

SUPPORT DEPARTMENTS MATERIALS MANAGEMENT

SHIPPING

ADMINISTRATION

QUALITY

MAINTENANC E

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

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

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

REFERENCES

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http://findarticles.com/p/articles/mi_m0O http://www.rcainstitute.org/ http://en.wikipedia.org/wiki/Grenzplankos http://www.agavapen.org/files/White.RCA http://www.antiessays.com/free-essays/1