1 RCA Discussion RCA in Action: Applications and Cases Larry R. White, CMA, CFM, CPA, CGFM Executive Director Resource Consumption Accounting Institute

2 Resource Consumption Accounting RCA Inherits Core Principles from German Cost Management (GPK) –Well Developed Standard Costing System –Practiced since the Late 1940’s –Principles used in 3,000+ Companies RCA Creates an Integrated Economic Model of Operations for Decision Making –Internal Management Decision Making –Link Operational Metrics to Finance –Reflect Clear Cause and Effect Relationships RCA Resource view Advantages Process view Advantages GPK ABC Capacity Analysis and Management Process Analysis and Management Capacity- Focused Activity- Focused

3 RCA Recognition Traditional Standard Costing Activity Based Costing

1.Model the resources, their capacity, and what consumes/uses them 2.Model the quantities of resources consumed, and the nature of that consumption Nature = Fixed or Proportional Cause and effect operational Model 3.Model the costs that flow with the quantities and the nature of the consumption 4 The RCA Modeling Approach

Corporate Headquarters Step 1 : Model Resources, Capacities, and Consumption Path 5 Plant Labor Direct Materials Capacity 240 Hrs Capacity 240 Hrs Capacity Unlimited Finished Product Training HQ Reporting Idle Plant & Maintenance Labor Plant Maintenance

Corporate Headquarters Step 2 : Model Consumption Rates and Nature 6 Plant Labor Direct Materials Capacity 240 Hrs Capacity 240 Hrs Capacity Unlimited Finished Product Training HQ Reporting 1 lbs. per unit 4 hrs. per unit 2 hrs. per unit 80 hrs. per month 80 hrs. per Month 30 hrs. per month 80 hrs. per month Idle Plant & Maintenance Labor Plant Maintenance Calculated based on production Proportional Fixed

Corporate Headquarters Step 3 Add Costs and Flow with Resource Quantities 7 Plant Labor Direct Materials Capacity 240 Hrs Capacity 240 Hrs Capacity Unlimited Finished Product Training HQ Reporting 1 lbs. per unit 4 hrs. per unit 2 hrs. per unit 80 hrs. per month 80 hrs. per Month 30 hrs. per month 80 hrs. per month Idle Plant & Maintenance Labor Plant Maintenance Calculated based on production Materials Proportional Cost Fixed Cost xx Idle Labor Fixed-Training xx Fixed–HQ Reporting xx $300 $1.25 per hr $200 $0.83 per hr $10 per unit Proportional Fixed

Corporate Headquarters MANAGERIAL ACCOUNTING – MULTI-LEVEL P&L 8 Plant Labor Direct Materials Capacity 240 Hrs Capacity 240 Hrs Capacity Unlimited 1 lbs. per unit 4 hrs. per unit 2 hrs. per unit 80 hrs. per month 80 hrs. per Month 30 hrs. per month 80 hrs. per month Plant Maintenance Calculated based on production $300 $1.25 per unit $200 $0.83 per unit $10 per unit Proportional Cost Fixed Cost 8 Corporate P&L Plant P&L Product P&L Materials Proportional Cost Fixed Cost xx Idle Labor Fixed - Training xx Fixed HQ Reporting xx Revenue xx Product Margin xx Plant Margin xx Corporate Margin xx

Applications 9

10 Plastic Film Extrusion  Pre-RCA Issues  Product costs fluctuated based on unrelated changes in volume and mix  Products manufactured on newer machines receive greater cost allocations even if the products were identical  Old machines were fully utilized and new machines underutilized  Sales reps lowered selling prices (non-strategically) to increase volume in an effort to decrease allocated cost per unit and thus ‘improve’ their margin  RCA Results  Product cost is stable even if machine is replaced by a new one  Machine utilization issues resolved  Fixed costs assigned no longer change due to volume and mix  Margin manipulation eliminated; in fact, it was shown that Standard Costing overstated fixed costs assigned to product.

11 Semi-conductor Business Product Pricing –Life cycle product pricing vs. short-term product pricing –Because equipment was old (fully depreciated) RCA provided insight on the long-term profitability of product decisions Cost Attribution –Proper attribution of common fixed costs to market segments e.g., machine excess/idle capacity to a product group –The gross margin of the product group reduced by 63% Batch Sizes –Understand the effect of smaller batch sizes on profitability –Normal batch = 24. The most often manufactured product had a 22% drop in gross margin at batch = 12 Product Mix –Understand factory bottlenecks for different volume and mix –Understand how bottleneck moved with volume and mix –Simulation and planning capability

12  Business Scenario  A new/green-field automotive original equipment manufacturer (OEM)  Acquired their way into the automotive business by buying the rights to make and re-badge a model from another OEM  Large SAP implementation  They needed to integrate highly automated support areas (e.g., automated storage and retrieval warehouse) into the costing model  RCA Cost Model  Significant royalty costing at various levels in the BOM  The ability to run the cost model from resources through to products and sales (i.e., typical costing) or to run the model backwards from projected sales volumes to resource demand  Effective capacity management a primary objective also for support areas Automotive OEM

Catalytic Reduction Systems Link Operational Metrics to Finance –Real time dashboard of key KPI’s allowed for quicker reaction to operations performance issues –Focus on KPI’s that are financial drivers –Drill down to financial detail –Simulate financial impact of changes to operational KPI’s

Home Deliver innovative products and services that improve air quality and maximize stakeholder value Customer PerspectiveLearning & GrowthFinancial Perspective Internal Processes This Balanced Scorecard summarizes Key Performance Indicators from several critical systems. Select a Perspective to drill through the detailed analysis. Sample Data / Illustration Only Multiple users have different needs for looking at the data - Ease of use is the key to adoption of this application. Catalytic Reduction Systems

Financial Perspective Customer PerspectiveLearning & Growth Financial Perspective Internal Processes Home All FacilitiesFacility 1Facility 2 June 2011 Total Costs Analysis Drill-Down Sample Data / Illustration Only Quick and clear understanding of trends, drives correct problem recognition

Financial Perspective Customer PerspectiveLearning & Growth Financial Perspective Internal Processes Home All FacilitiesFacility 1Facility 2 Total Costs Analysis June 2011 Detail Sample Data / Illustration Only Drill-downs enable quick detailed analysis with icons: the forming line and extruder need further analysis

Financial Perspective Customer PerspectiveLearning & Growth Financial Perspective Internal Processes Home All FacilitiesFacility 1Facility 2 Cost Center Analysis / Extruder Sample Data / Illustration Only In this case actual maintenance costs are higher than target, so this is where investigation would start. (Variance is based on a percentage range over target)

Internal Processes Customer PerspectiveLearning & Growth Financial Perspective Internal Processes Home 70 % Product CompositionProduction Product Composition / Product A Sample Data / Illustration Only The single shared model gives common understanding of product line performance for all users (product managers, engineers, etc.)

Internal Processes Customer PerspectiveLearning & Growth Financial Perspective Internal Processes Home Production Efficiency / Product A Product CompositionProduction Sample Data / Illustration Only Managers can simulate the impact of future decisions using (+/- icons). Very helpful in forecasting.