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Gaining effective organizational control with RCA. (Cost Management).

Resource consumption accounting can provide accurate, equitable performance measures and highlight deviations for you to investigate and correct.

This is the second in a series of two articles on the application of resource consumption accounting (RCA) planning and control principles. Last month we discussed activity-based resource planning (ABRP) and use of the resource consumption accounting (RCA) quantity-based cost model to satisfy the demands of operational planning. This article builds on the first in demonstrating how RCA principles can enable effective control in an enterprise.

Control has received sparse attention in activity-based costing (ABC), which can be attributed to ABC's evolutionary development. ABC began as an actual cost system. Then, in the 1990s, activity-based budgeting (ABB) surfaced, indicating a desire to address operational planning. The next step will be the measurement of actual results against predicted. We believe a comprehensive control solution, based on resource consumption accounting principles, is the way to go and will leapfrog ABC's evolutionary development.


Effective organizational control is the timely measurement of actual results against a relevant benchmark to obtain information on performance and deviations for corrective action. Control is more than measurement and analysis; it includes the determination of a relevant threshold, given prevailing circumstances-i.e., adjusting to changes to remain perpetually relevant as a yardstick. The best way to achieve this is by leveraging the superior qualities of a cost model based on RCA principles- recognition of management tiers, quantity-based definition of causal relationships with unit standards, and RCA's view of the nature of cost. A system based on RCA principles provides the following control mechanisms:

* Management planning and control tiers and their objects,

* Authorized reporting,

* A reflective view of operations, and

* Extensive variance analysis.

Management Planning and Control Tiers and Their Objects

From a control aspect, a key differentiator for resource consumption accounting is the recognition of at least four generic management planning and control tiers: the resource tier, the value chain tier, the product/service tier, and the results tier. Figure 1 depicts the RCA cube planning and control system, which is a potential alternative to the ABC/CAM-I cross. In ABC/ABM, the cross is used to show how cost flow/valuation is integrated with performance measurement in two dimensions. Cost/value flows in the ABC cost model are along the cross's vertical axis, which means costs are assigned from resources to activities to cost objects. Performance measurement occurs along the horizontal axis of the cross. We believe that the CAM-I (ABC/ABM) cross has these shortcomings:

* Too narrow a focus, i.e., exclusively on the value chain, and

* It doesn't adequately consider the varying information and performance measurement needs for the three levels of management (operational: line, tactical: middle, and strategic: top management).

In the RCA cube, valuation is also on the vertical axis--the middle one. But the RCA cube has four parallel performance measurement tracks (width)--one for each tier. The CAM-I cross performance measurement aspect is the second one from the bottom, the one that relates to the value chain. Moreover, the RCA cube reflects the different information and performance measurement needs of the three levels of management in the third dimension--depth.

A number of objects within each tier, which will be discussed below, serve as discrete information collectors, measurement points, and control enablers.

Authorized Reporting

Authorized reporting is best understood as akin to traditional flexible budgeting. In RCA, the method of arriving at the new numbers is different, but the principle is the same. Authorized cost or authorized profit would be the cost/profit that should have been achieved given actual output levels and standard costs/prices. The word "authorized" is used in the sense that costs are approved to the new (calculated) level as opposed to the original (static) level of the budget. (The term "target cost" or "target profit" is also sometimes used, but we avoided it here because of the extensive use of target costing in the durable goods and automotive industries, where it means the intended unit product cost at maturity.) That means costs to the new (calculated) level are approved automatically (authorized) to be incurred without any questions asked, i.e., if the output level was higher than anticipated. Variances in RCA are always calculated between authorized and actual costs/profits.

Authorized reporting entails the restatement of expected costs and/or profits for the control period (the review period that compares actual results with anticipated results), taking into account fluctuations in all factors that influence cost behavior. It occurs at the object level within each tier. Figure 2 indicates for each of the four generic tiers in resource consumption accounting typical objects that are used and whether authorized cost (a flexed cost budget) or authorized profit (a flexed P&L statement) would be used to, for example, measure the particular team's or manager's performance. A check mark indicates that, yes, the particular method will be used for the object, and an X indicates that it won't be used. For example, an authorized cost report in the value chain tier entails recasting expected activity costs up or down based on the fluctuation (up or down, respectively) of actual activity output, while, for a particular market segment, an authorized profit report will be used based on actual sales volumes and mix. The authorized report for an entire tier comprises the collective authorized reports for all objects within that tier.

Authorized information is a more relevant yardstick for comparison with actual information. Moreover, going beyond just a traditional scientific management-based standard RCA allows for the effective application of decentralized responsibility accounting principles, in the current era of the knowledge worker, in all functions of an enterprise.

For an illustration of authorized reporting, consider the analytical cost plan (ACP) for an airport apron services resource pool (Table 1, planned columns). Apron services provide fueling, potable water, and sanitation services at the departure gate. Primary and secondary costs, split into fixed and proportional, are shown for an output level of 10,000 equipment hours. Primary costs for diesel fuel and depreciation are planned costs. Secondary services are for maintenance hours consumed--i.e., a quantity-based definition of the causal relationship. Unit cost rates for maintenance are $10 fixed and $15 proportional per hour. Planned maintenance hour consumption (100 fixed and 1,000 proportional) results in planned secondary costs as shown.

Actual equipment utilization for apron services for the period was really 9,000 hours, and actual costs were $88,250. Comparing this to the original plan, the plan vs. actual report (Table 1) shows a variance of $4,250 (favorable). But this static measure doesn't appropriately consider the dynamics of the environment. Adjusting the measure to better reflect actual output levels provides a different view of the result. Table 2 compares actual information with authorized; the overall variance is now $2,250 (unfavorable). Note: Authorized secondary costs are calculated from authorized secondary quantities multiplied by the standard rates for maintenance. Authorized reporting uses the "bricks and mortar" of the quantity-based cost model to provide a highly relevant yardstick.

Control is further enhanced by the ability to impute the maintenance resource pool's expected result using the authorized quantities calculated in Table 2. Authorized reports can be generated through multiple layers of causal relationships, i.e., inverting the simultaneous cost model, being cognizant of the fixed and proportional quantity relationships as dictated by the changing nature of cost at the time of consumption. You need to invert causal relationships to translate independent variables (e.g., actual product mix produced) to predict related dependent variables (e.g., expected number of setup hours). Hence, within a tier, the authorized adjustments for various objects will occur according to the parameters relevant to each object. A shift in product mix to more-complex low-volume products will be effectively accommodated in the control system. Individual tiers will adjust in accordance with their own parameters, no matter what the overall result is for the enterprise. For example, despite an overall p ositive result, poor performance in a particular tier or object will be highlighted.

From a strategic management perspective, authorized reporting more accurately reflects a company's current course. In this regard, and as noted above, different tiers react differently to change. Authorized reporting will calculate the expected results and provide valid yardsticks because it uses the quantity-based relationships behind the resources consumed. With a better indication of current direction for each object and tier, augmented with variance analysis, management can effectively influence the company's direction.

A Reflective View of Operations

Going beyond just the mere descriptive view (using historical data looking backwards) and the predictive view (projecting future results), RCA also enables a reflective view of operations (what is happening right at this moment). The quantity structure inherent in resource consumption accounting combined with unit standards throughout the cost model enables real-time measurement of actual performance (see sidebar). An airline that implemented RCA was able to obtain flight profitability information every morning for the flights from the previous day. With RCA, as soon as certain key flight data (flight hours, cycles, number of passengers per class) were posted using standard cost rates, product profitability and product cost analysis were possible. This meants it is no longer necessary to wait for period-end before meaningful information is available to gauge progress and support decisions.

Extensive Variance Analysis

A key attribute of an effective control system is its ability to support variance analysis tailored to each objest and tier. In RCA, the recognition of management tiers and their objects has three important implications:

* The ability to provide input- and output-side variances.

* A clear delineation of controllable and uncontrollable variances, and

* Effective organizational learning.

Input- and output-side variances. In an RCA cost model, all cost movements occur as debits and credits--one object's output (credit) becomes the input (debit) into the consumer. This enables the classification of variances as those related to the input side of an object and those related to the output side. Figure 3 lists a number of potential variance categories for each tier and their classification as either input-side or output-side variance.

A number of factors determine whether certain variance categories will be available. For example, in a frozen standard cost system you wouldn't calculate price variances. The particular production method used also determines which product cost variance categories are available. For example, the lot-size variance doesn't exist in engineer-to-order environments.

Here's a simple variance calculation example using an apron services activity. The activity "prepare aircraft" consumes the secondary services shown in Table 3. Table 4 shows the analytical cost plan for the activity, corresponding to an output level of 5,000 aircraft turnarounds. No primary costs are planned. Only proportional resource outputs for secondary services are consumed, such as fueling, potable water, and sanitation. The activity has cost rates of $150 fixed and $29 proportional.

Table 4 also indicates that 5,500 actual turnarounds were performed and that actual costs were $999,800, which results in an unfavorable variance of $104,800 when compared to the original plan. Table 5 shows the authorized report for "prepare aircraft" and serves as the basis for variance calculation. Authorized quantities for apron service resources are calculated, which correspond with the actual activity output of 5,500 turnarounds. Apart from an output level higher than planned, the cost rates for sanitation service (Table 3) also increased, from $150/hour to $160/hour. The authorized report shows a total input variance of $15,300, comprising a favorable quantity variance of $1,200--1 hours x $120--due to 10 fewer water truck hours consumed and an unfavorable input price variance due to the price increase of the sanitation service--$ 16,500 (1,650 hours x $10). Note that more than one variance category per line can exist. For example, water service could have a price and a quantity variance. For simplici ty, we assumed in this example that each line has only one variance that isn't zero. On the output side, the net increase in input costs results in underabsorption of $15,300--an output price variance for the activity, i.e., $181.78 actual rate vs. $179 planned rate.

Controllable and uncontrollable variances are identified by object within tiers. For example, in Table 5 the input price variance would be considered uncontrollable to the apron services team while the quantity variance would be considered controllable. Moreover, an uncontrollable variance in one tier, object, or management level might be controllable in another.

Effective organizational learning is enhanced when knowledge worker teams have clear insight into the causes and effects that relate to their sphere of responsibility. The proper delineation of responsibility for variances is crucial to an effective control system. The classic faux pas of variance accountability is holding line managers responsible for excess/idle capacity, which invariably leads to ballooning inventory levels. Middle management, responsible for resource reassignment or realignment, should be responsible for excess/idle capacity.

Hence, resource consumption accounting enables effective organizational control, not only in providing accurate and equitable performance measures but also in highlighting deviations for investigation and corrective action.
Table 1

Planned Output and Unit Standards to be Used for Authorized Reporting


Resource Pool: Apron Services

Output: Equipment Hours

Planned Quantity: 10,000

Actual Quantity: 9,000


 Plan Plan Plan Plan
 Fixed Prop Actual Fixed Prop

Diesel Fuel $0 $40,000
Depreciation 25,000 0


Equip. Maintenance 100 1,000 1,050 12,500 15,000
 $37,500 $55,000

 Actual Variance

Diesel Fuel $37,000 ($3,000)
Depreciation 25,000 0


Equip. Maintenance 26,250 (1,250)
 $88,250 ($4,240)
Table 2

Authorized Report for an Apron Services Resource Pool


Resource Pool: Apron Services

Output: Equipment Hours

Planned Quantity: 10,000

Actual Quantity: 9,000


 Authorized Actual Authorized Actual

Diesel Fuel $36,000 $37,000
Depreciation 25,000 25,000


Equip. Maintenance 1,000 1,050 25,000 26,250
 $86,000 $88,250


Diesel Fuel $1,000
Depreciation 0


Equip. Maintenance 1,250
Table 3

Apron Services Resource Pool's Cost Rates

 Planned Cost Planned Cost Rate:
Resource Pool Output Unit Rate: Fixed Proportional

Fueling Rig Equipment Hours $200.00 $20.00
Water Truck Equipment Hours $100.00 $20.00
Sanitation Truck Equipment Hours $100.00 $50.00
Table 4

An ACP for an Activity with Actual Costs


Activity: Prepare Aircraft A7X7

Driver: # Aircraft Turnarounds

Planned Quality: 5,000

Actual Quantity:


 Plan Fixed Plan Prop Actual



Fuel 0 2,500 2,750
Water 0 1,000 1,090
Service 0 1,500 1,650


Activity's Planned Cost Rates

 Plan Fixed Plan Prop Actual Variance

N/A $0 $0 $0 $0


Fuel 500,000 50,000 605,000 55,000
Water 100,000 20,000 130,800 10,800
Service 150,000 75,000 264,000 39,000

Totals $750,000 $145,000 $999,800 $104,800

Activity's Planned Cost Rates $150 $29
Table 5

Authorized Report and Variances for the Prepare Aircraft Activity


Activity: Prepare Aircraft A7X7

Output: # Aircraft Turnarounds

Planned Quantity: 5,000

Actual Quantity: 5,500



 Authorized Actual Authorized Actual

N/A $0 $0


Fuel 2,750 2,750 605,000 605,000
Water 1,100 1,090 132,000 130,800
Service 1,650 1,650 247,500 264,000

Totals $984,500 $999,800


Cost Recover 984,500 984,500
Underabsorption 0 15,300

 Variance Category

N/A $0 --


Fuel 0 --
Water (1,200) Input Qty
Service 16,500 Input Price

Totals $15,300 Total Var.


Cost Recover 0 --
Underabsorption 15,300 Output Price
Figure 2

Example Objects and Authorized Reports per Tier


RESOURCE Resource Pool Y X
AREA Event Management Object N/A (1) X
AREA Activity Y X
PRODUCT/ Make to Stock Y X
SERVICE AREA Make to Order Y X
 Engineer to Order N/A (1) X
 Process Manufacturing Y X
 Service Object Y X
RESULTS Market Segment N/A (2) Y
AREA Target Market N/A (2) Y

(1)Lot size is typically one; plan-actual reporting is sufficient.

(2)Included in the Authorized Profit Report.
Figure 3

Variance Categories for a Generic Set of Control Tiers



Input Price Variance * * *
Input Quantity Variance * * *
Resource Usage Variance * * *
Remaining Input Variance * * *
Scrap Variance *
Sales Mix Variance *


Output Price Variance * *
Output Quantity Variance * *
Fixed Cost Variance - Volume *
Fixed Cost Variance - *
 Secondary Fixed Cost
Remaining Output Variance * *
Idle Capacity Variance
Lot Size Variance *
Mixed Price Variance *



Input Price Variance *
Input Quantity Variance *
Resource Usage Variance *
Remaining Input Variance *
Scrap Variance
Sales Mix Variance


Output Price Variance *
Output Quantity Variance *
Fixed Cost Variance - Volume *
Fixed Cost Variance - *
 Secondary Fixed Cost
Remaining Output Variance *
Idle Capacity Variance *
Lot Size Variance
Mixed Price Variance


The real-time measurement capability in practice is to a large degree dependent on the information technology solution deployed. Enterprise resource planning (ERP) systems with tight integration between financial and logistics applications and real-time processing capabilities are ideally suited to this purpose.

Tight integration between modules ensures:

* A single point of data entry for all applications,

* Validation of all input data at the source, and

* Reduced reliance on batch interfaces, which delay information and have high potential for errors.

ERP systems with real-time processing capabilities ensure immediate availability of operational/ logistics quantities and statistics to the costing module when logistic transactions are executed.

The degree of data integrity and timely availability of information provided by some ERP systems allow an enterprise to take full advantage of the quantity-based causal relationships and unit standards in an RCA cost model and to achieve real-time control and performance measurement.

David E. Keys, CMA, CPA, is Household International Professor of Cost Management at Northern Illinois University. He has written more than 50 articles and five books on cost management, several of which are Consortium for Advanced Manufacturing-International (CAM-I) related. You can reach him at (815) 753-1538 or

Anton van der Merwe is a director at PricewaterhouseCoopers in their management consulting practice. He specializes in ERP system implementations and has more than 13 years' experience in this field, with an emphasis on cost accounting and decision support. You can reach Anton at or (513) 361-8172.
COPYRIGHT 2002 Institute of Management Accountants
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Title Annotation:resource consumption accounting
Author:Keys, David E.; Merwe, Anton Van Der
Publication:Strategic Finance
Article Type:Statistical Data Included
Geographic Code:1USA
Date:May 1, 2002
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