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 S1 S2

Production Departments 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 • Total Overhead =
• Product A 100,000 €
1 hr of direct • Total Direct
Labor Labor=2000 hrs
Direct Labor Cost : 1 hr • OH Rate/hr = 50 €/hr
* 20 € • Product A : 1 hr of
= 20 € Direct Labor
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) Capacity Analysis
Process Analysis &
– GPK is a well developed
Standard Costing System & Management
Management RCA
– Principles applied in
practice since the late
1940’s
– Principles implemented by
3,000+ companies

Resource Process
• RCA integrates–Activity- View View
based Costing and GPK Advantage Advantages
s
GPK ABC
• RCA creates an integrated
economic model of
 RCA
WHAT IS THE SOURCE • CHARACTERISITICS
OF COSTS IN AN OF COSTS:
ORGANIZATION? • Fixed or Proportional
Products • Attributable to a
Overhead resource
Processes or • Original
Activities Characteristics
change as they are
used by an
organization’s
Resources Cause processes.
Costs!!!
 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 PRODUCTION
DEPARTMENTS DEPARTMENTS
1 CONVERTING DEPT – 2 SHEET
CUTTERS, 1 REWINDER & 1
PERFORATOR

SUPPORT
DEPARTMENTS

QUALITY
MATERIALS SHIPPING
MANAGEMENT
MAINTENANC
ADMINISTRATION 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
• 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