Achieving Excellence in Cost Management Resource Consumption Accounting

Transcription

1 Achieving Excellence in Cost Management Resource Consumption Accounting Larry R. White, CPA,CMA, CFM, CGFM Director, RCA Institute

2 Speaker Biography Larry is the Executive Director of the Resource Consumption Accounting (RCA) Institute. He retired from the US Coast Guard as a Captain with over 28 years of service, 21 years in financial management and accounting. He was Commanding Officer of the CG s National Finance Center, Deputy CFO of the Coast Guard, and comptroller of 3 major field commands. His current professional activities include serving on the Association of Government Accountant s Professional Certification Board for the CGFM certification, the Board of Directors of the Institute of Management Accountants, the Editorial Advisory Board for Cost Management magazine, columnist for Automation World, and a the Metrics Strategic Initiative Committee of the Manufacturing Enterprise Systems Association. His past service to the accounting profession includes service as a member of International Public Sector Accounting Standards Board of the International Federation of Accountants; Chairman of the Board of the Institute of Management Accountants; a member of the AICPA Members in Government Committee (now GAAC); a member of the AICPA Special Committee on Enhanced Business Reporting; and on the Board of Directors of the Consortium for Advanced Manufacturing -International (CAM-I).

3 Achieving Excellence in Cost Management Key to Excellence in Cost Management Challenges to Excellence in Cost Management Principles for Costing Resource Consumption Accounting

4 Key to Cost Management Optimizing the employment of resources.

5 Simple Process Resource Pool Proportional OUTPUT Fixed Another Resource Pool (s) Or Final Product/Service Organizational Element (Support or Production) Material/Commodity Labor Equipment Operating Budget Material Services (Reflecting Resources Applied) Resource Quantities Drive Monetary Quantities 5

6 Resource Pool A Frequently a little more complex Resource Pool E Final Output 1 Resource Pool B Final Output 2 Resource Pool F Resource Pool C Final Output 3 Resource Pool G Final Output 4 Resource Pool D Resource Pool H

7 Operational View Financial View Real Time Action Oriented Internally Focused Resource/Resource Pools Intermediate Outputs Processes/Value Streams Products/Services FR Time Report Oriented Externally Focused

8 RCA Recognition Activity Based Costing Traditional Standard Costing 8

9 Technical General Ledger as a data source Challenges to Excellence in Costing External Financial Reporting Perspective Management Accounting Methodology Confusion Cost Benefit/Risk Knowledge & Skills Traditional Standard Costing Capacity & Excess Capacity Fixed &Variable Costs Mixing up Cost Concepts

10 Consumption Concepts Operational Decision Support Opportunity Cost Fixed Variable Avoidable Unavoidable Relevant Range Can be Modeled Basis for Action Divisibility of Resource Information

11 Costing Principles International Federation of Accountants International Good Practice Guide: Evaluating and Improving Costing in Organizations Resource Consumption Accounting Principles

12 Enterprise Financial Management Tax Accounting Financial Accounting Source data capture (transactions) Managerial Accounting Non-financial data capture Cost Measurement Cost Accounting External financial Reporting e.g. GAAP, IFRS Costs of goods sold Inventory valuation The Domain of Costing Performance Evaluation & Analysis For example: Assessment of current strategy & plans Integrated cost/operational performance measures (e.g. cost variance, capacity measurement, process efficiency etc) Profitability reporting Process analysis Learning & corrective actions Planning & Decision Support For example: Fully absorbed and incremental costing Adaptive operation & cost based planning, budgeting & forecasting What-if analysis & planning Product, process, channel, & customer strategic adaptations Enterprise optimization (e.g. make vs. buy, outsource etc) Lower Historical Value-added to managerial decisions Predictive Higher

13 IFAC Key Principles The importance of costing to good financial management The ability to identify, measure, interpret, and present costs as they relate to an organization s economic flow of goods and services, both historically and in a forward-looking context is necessary for a informed understanding of the organizational drivers of profit and value. Fitness for purpose Cost information should be prepared in a manner appropriate for the specific context and purpose of its use, of which there are three principal applications: External reporting historical and descriptive; Performance and Cost Evaluation and Analysis interpretative and diagnostic; Enterprise Planning and Decision Support analytical and predictive. LRW Comment: Use of costs calculated for one purpose may be unreliable if used for another purpose.

14 Business model/reality driven IFAC Key Principles Cost models should be designed and maintained to reflect the causeand-effect interrelationships and the behavioral dynamics of the way the organization functions. The information needs of decision makers at all levels of an organization should be taken into account, by incorporating an organization s business and operational models, strategy, structure, and competitive environment. Materiality/Cost Effectiveness The design, implementation, and continuous improvement of costing methods, data collection, and systems should reflect a balance between the required level of accuracy and the cost of measurement (i.e., cost benefit tradeoff), based on the competitive situation of the organization.

15 IFAC Key Principles Comparability over time and Consistency Cost information should be collected and analyzed systematically and in such a way as to ensure comparability over time, whether in a routine information system or for a specific application and/or purpose. Transparency and Auditability Definitions and sources of cost data, the operational and other nonfinancial data underpinning them, and the methods of calculation of costs, should be transparent to users and capable of review, risk analysis, and assurance.

16 Enterprise Financial Management Tax Accounting Financial Accounting Source data capture (transactions) Managerial Accounting Non-financial data capture Cost Measurement Cost Accounting External financial Reporting e.g. GAAP, IFRS Costs of goods sold Inventory valuation The Domain of Costing Performance Evaluation & Analysis For example: Assessment of current strategy & plans Integrated cost/operational performance measures (e.g. cost variance, capacity measurement, process efficiency etc) Profitability reporting Process analysis Learning & corrective actions Planning & Decision Support For example: Fully absorbed and incremental costing Adaptive operation & cost based planning, budgeting & forecasting What-if analysis & planning Product, process, channel, & customer strategic adaptations Enterprise optimization (e.g. make vs. buy, outsource etc) Lower Historical Value-added to managerial decisions Predictive Higher

17 RESOURCES, OPERATIONAL QUANTITIES AND COSTS MANAGERS ANALOGOUS ACTIVITIES CONCEPTS Modeling Causality Criterion Analogy Criterion Information Use Operational Model Providing Attributable Cost = CONCEPTS Baseline Optimization Information

18 Cause and Effect Responsiveness Attributability Work RCA Modeling Principles

19 Causality Optimization Thinking: For a Given Outcome Understand the Cause For A Decision Alternative Understand the Effect Cost must reflect the operational resource flows or consumption to be logical and useful for decision making and control.

20 Responsiveness Inputs & their $ s Proportional Inputs Fixed Inputs An Output Product A Product B Inputs & their $ s Proportional Inputs Fixed Inputs An Output Service 1 Service 2 Service 3 Inputs & their $ s Proportional Inputs Fixed Inputs Inputs & their $ s Proportional Inputs Fixed Inputs Inputs & their $ s Proportional Inputs Fixed Inputs An Output An Output An Output

21 Variability Responsiveness Product A Product B Inputs Inputs Product A Product B Output Output Service 1 Service 2 Service 3 $ s Variable Cost Service 1 Service 2 Service 3 Change in Total $ s Due to a Change in Total Volume Inputs Inputs Inputs Fixed Cost Total Volume Output Output Output Traditional Principle of Variability: Total Cost to Total Volume Responsiveness 21

22 Attributability The principle of attributability assigns costs with a weak causal relationship to specific outputs (common costs) to the operational level responsible to manage them. Attributability is the responsiveness of inputs (and hence their costs) to decisions that change the provision and/or consumption of resources. Attributable Cost The closest you can come to fully absorbed cost maintaining the principle of causality 12/1/2010 8:10 PM RCA Institute

23 Attributability Support Resource Pools RCA Structure for Marginal Costing Quantitative Definition of Material Causal Relationships Support Activities Primary Resource Pools Primary Activities Excess Capacity Costs Product/Service Objects Result Segments - Revenue Responsibility

24 Without the Work Principle: Work Resource Pool A Product 123 Inputs: Planned Output: 1,000 Hrs Actual Output: 1,100 Hrs Pool A 1,100 Hrs Using the Work Principle: Resource Pool A Planned Output: 1,000 Hrs Actual Output: 1,100 Hrs Setups Run Machine Product 123 Inputs: Setups (Qty 10) 300 Hrs Run Machine 800 Hrs 24

25 Resource Consumption Accounting RCA Inherits Core Principles from German Cost Management (GPK) Grenzplankostenrechnung (GPK) Translated Flexible Analytic Cost Planning & Control Well Established Standard Costing System Principles Applied in Practice since the late 1940 s Implemented by 3,000+ Companies Capacity Analysis and Management RCA Process Analysis and Management RCA Integrates Activity-based Costing and Throughput Concepts RCA Creates an Integrated Economic Model of Operations for Decision Making Enterprise Optimization Principle Based Superior Marginal Analytics Resource view Advantages GPK Capacity- Focused Process view Advantages ABC Activity- Focused 25

26 Costing Continuum/Levels of Maturity Bookkeeping 1 Blind No marginal insights No Marginal Insight Descriptive: Expense Tracking, Cost Reporting and Consumption Rates Process/ lean accounting 2 Process Visibility Limited process marginal insights Direct cost to outputs 3 Output Visibility Direct cost marginal insights Add indirect costs 4 Output Visibility All output cost marginal insights Individual std costs, project & job costing 5 Explicit Outputs Output specific marginal insights Push activitybased costing (ABC), Product costs 6 Explicit Indirect Costs Explicit output marginal insights Level 6 with customer & channel profitability reporting; Cost-toserve 7 Customer Demand Sensitive Add customer & channel marginal insights Marginal Insight Awareness Unused capacity costs (estimated) 8 Unused Capacity Aware Common fixed costs begin to be isolated Predictive: Demand Planning Driven with Capacity Sensitivity (ABRP); forecast driver quantities X std unit rates, driverbased budgeting 9 Pull ABC Resource Planning Increased ability to isolate common fixed costs (TDABC); forecast driver quantities X std unit rates; direct cost focus; repetitive work conditions 10 Timedriven ABC Increased ability to isolate common fixed costs Attributable costs on all objects, blends activity and direct resource charges, consumes activities back to resources 11 RC A Finite systems modeling 12 Simulation Explicit resource cost object, supplybased denominator, strong & weak forms of causality catered for No change 26 Detailed Marginal Insights

27 RCA Storyboard S: Ancillary Production Equipment S: Plant Engineering and Maintenance S: Administration Human Resources & Accounting RP: Dryer (Hours) Capacity: 100 Output Qty: 100 RP: Chiller (Hours) Capacity: 50,000 Output Qty: 50,000 RP: Plant Maintenance (Maint. Labor) Capacity: 30,000 Output Qty: 30,000 RP: Admin Labor (Labor hours) Capacity: 17,000 Output Qty: 17,000 Perfor m HR Perfor m Legend S-Support Accou nting P- Production P: Extrusion Line S: Quality Assurance Perfor m Admin Department Resource Pool Abbreviated RP RP: Extrusion Labor (Labor hours) Capacity; 32,000 Output Qty: 30,000 RP: Extrusion Machine1 (Machine hours) Capacity; 17,520 Output Qty: 10,000 RP: QA Labor (Labor hours) Capacity: 14,000 Output Qty: 14,000 QA Testin g Produ ct Activi ty Manufacturing Costs Product Support Cost Retur ns Product P & L s Common Costs 27

28 RCA Data Collection Plant Maintenance Resource Pool Output Measure: Maintenance Labor Hour Output Quantity: 20,000 Hours Primary Costs Fixed Proportional Technician Wages $ - $ 600,000 Supervisor Salary $ 80,000 $ - General Material $ 12,000 $ 100,000 Depreciation: Shop Equipment $ 50,000 $ - Secondary Costs Resource Pool Output Fixed Qty Prop Qty $ 142,000 $ 700,000 Utilities MW-Hrs $ 6,000 $ 24,000 Activity/Process Driver Fixed Qty Prop Qty HR: Benefits Adjustments # Adjusts 22 0 $ 1,100 $ - Purchase: Gen Materials # PO's $ 500 $ 10,000 $ 7,600 $ 34,000 Total Resource Pool Costs $ 149,600 $ 734,000 Unit Cost Rates (/20,000 Hrs)

29 RCA Multi-Level P&L 29

30 Marginal Costing Requirements Incorporate Foundational Economic Principles 1. Provide an accurate rendering of an enterprise s flow of economic goods and services. Accommodate the strong form of causality. Accommodate the weak form of causality 2. Link the quantitative flow of goods and services to their monetary implications. 3. Provide insight into inputoutput behaviors - and their respective costs Segment Information to Enhance Its Relevance to Decision Makers 4. Segment the cost model for only that portion of economic goods and services relevant to the decision at hand. 5. Reflect all causal relationships and their characteristics relevant to the decision 6. Provide accurate monetary information for all relevant cost categories appropriate to the decision.

31 Simple Model Corp Reporting Plant Maintenance Capacity: 240 hrs Fixed: 80 hrs/mth Fixed: 80 hrs/mth Prop: 2hr/Unit Corporate Segment Plant Labor Capacity: 240 hrs Prop: 4hr/Unit Fixed: 30 hr/mth Product A Fixed: 80 hrs/mth Safety Training Idle Capacity Raw Material Capacity: Unlimited Prop: 1 lb/unit Plant Segment

32 Proportional Cost Fixed Cost Product P&L Revenue xx Direct Materials Capacity Unlimited $10/lb 1 lbs. per unit Materials Proportional Cost xx xx Plant Labor Capacity 240 Hrs $200 $0.83 per unit 4 hrs. per unit 30 hrs. per month Fixed Cost Product Margin xx xx Plant Maintenance Capacity 240 Hrs $300 $1.25 per unit 2 hrs. per unit 80 hrs. per month Plant P&L Idle Labor xx Calculated based on production Fixed - Training xx 80 hrs. per month Plant Margin Corporate P&L xx Corporate Headquarters 80 hrs. per Month Fixed HQ Reporting xx Corporate Margin xx Adapted from TRIPOD ASSOCIATES LLC

33 Product P&L Production of 20 units at $50 price per unit RCA MODEL Marginal P&L Overall Per Unit Revenue $1000 $50 Materials 200 Throughput Margin Prop Plant Labor Prop Maint Product Cont. Margin Fixed Plant Labor 25 Fixed Maintenance 100 Product Gross Margin Plant P&L Idle Plant Labor Idle Maintenance Fixed - Training 67 Plant Margin 400 Corporate P&L Fixed HQ Reporting 100 Corporate Margin 300 Note: figures are rounded Adapted from TRIPOD ASSOCIATES LLC

34 RCA Modeling Example Support 1 IT Help Desk Service A Service B Service P&L Support 2 Human Res 34

35 RCA Modeling Example Support 1 IT Desktop Ticket Qtys Qtys Qtys Qtys Help Desk Qtys Service A Service P&L Service B Process Payroll Qtys Qtys Support 2 Human Res 35

36 Maintenance Nightmare It typically does not make sense to try and periodically (i.e., monthly) capture all this data and then feed it into the cost model. RCA uses the ability to impute standard relationships to significantly reduce data collection needs. Consider the relationship between a machine and the utilities it uses. 200 Kilowatts per Machine Hour Electricity Machine Hours 12/1/2010 8:10 PM RCA Institute

37 Imputing Actual Quantities The standard relationship is defined in planning. For actual consumption all you have to do is tell the system the actual number of machine hours worked and the cost model will impute the actual electricity consumed. Actual Machine hours worked: 500. Actual KwH s Consumed is 100,000. Electricity 200 Kilowatts per Machine Hour Machine Hours 12/1/2010 8:10 PM RCA Institute

38 Imputing Quantities Imputing consumption quantities in RCA can occur for any relationship or any series of relationships if a standard can be defined. Consider a purchasing example. 2.5 Hours of Work P.O. Qty: XX $: YY 10 P.O.s Purchasing 15 Min. per P.O. Service A 12/1/2010 8:10 PM RCA Institute

39 Imputing A Series of Quantities If one has a standard quantifiable relationship between the P.O. s and the Service the only data you would have to provide the RCA model is the number of Services produced. P.O. Qty: XX $: YY Purchasing 15 Min. per P.O. 1 P.O. per Client The Service 12/1/2010 8:10 PM RCA Institute

40 Imputing A Series of Quantities If one has a standard quantifiable relationship between the P.O.s and the Service the only data you would have to provide the RCA model is the number of Services produced. Purchasing 2.5 Hours of Work 15 Min. per P.O. P.O. Qty: XX $: YY 1 P.O. per Client 10 P.O.s Service A Actual Service Output: for 10 Clients 12/1/2010 8:10 PM RCA Institute

41 Application Servers Output: Capacity: 15,000 16,000 Helpdesk Capacity: Output: 6,000 5,000 Utilities Output: Capacity: 50,000 60,000 Facilities Output: Capacity: 2,000 2,500 Human Res Application Output: Capacity: 5,000 6,000 Password Resets Capacity: Output: None 2,000 Output: Capacity: 1,400 1,600 12/1/2010 8:10 PM RCA Institute

42 Relationships - Assumptions Assume for the Moment that All Service Outputs Have to be Recorded. A Password Reset Requires 3 Minutes of Helpdesk time and 2 Application Transactions Human Resources Process Payroll is a Standard Based on Headcount per Pay Period. But, headcount is not an output on any of the receivers i.e., headcount does not feature in consumption relationships directly. All Utilities are Standard Consumptions, This Almost Always the Case. All Facilities Space are Standard Consumptions, this is also Almost Always True. 12/1/2010 8:10 PM RCA Institute

43 Application Servers Helpdesk Output: Output: Utilities Output: Facilities Application Output: Password Resets Output: Output: Legend: Recorded Imputed Human Res Output: 12/1/2010 8:10 PM RCA Institute

44 The Final Model Application Servers Helpdesk Output: Output: Utilities Output: Legend: Recorded Imputed Facilities Output: Human Res Output: Payroll Processing Application Output: HR Module Password Resets Output: 12/1/2010 8:10 PM RCA Institute

45 Characteristics of RCA Cost Model Is constructed based on fixed and proportional resource consumption quantities, which results in an accurate reflection of how resources are used in an organization. Is dynamic in that the model is able to adjust to changes in those consumption relations. Is flexible, the model does not become out of date due to rigid dollar based allocation relationships that is no longer valid when volumes and/or mix change. Requires very low maintenance to keep it current and able to provide managers with up to date information. Does all of the above while providing exceptional marginal information for decision analysis for all cost objects in the cost model. Fully absorbed costs can also be calculated by allocating attributed costs to product or service. 45

46 RCA Institute Institute Membership Corporate & Individual Certification Specialist, Practitioner, Master Software Products Adopter Exploratory Workshops Customized Workshops applying RCA to an organization Implementation Review/Assurance Support Adopting Organizations & Practitioner Expertise Adopter Internal Use Reviews Evaluations of An Organization s Effectiveness Using and Maintaining RCA

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