RCA Discussion: RCA Modeling, Cost Objects Larry R. White, CMA, CFM, CPA, CGFM Executive Director Resource Consumption Accounting Institute

Resource Consumption Accounting RCA Inherits Core Principles from German Cost Management (GPK) Practiced since the Late 1940’s Used in 3,000+ Companies GPK Strengths: Cost and Capacity Planning Marginal Profitability Analysis Focus: Internal Management Decision Making Planning/Optimization Marginal Analytics Capacity Use Insights RCA Resource view Advantages Process view GPK ABC Capacity Analysis and Management Process Analysis and Management Capacity-Focused Activity-Focused

RCA Recognition Activity Based Costing Traditional Standard Costing The International Federation of Accountants completed an International Good Practice Guide on Costing in July 2009. In doing this they created a maturity model for approaches to doing costing. To the left are the costing approaches that meet basic financial reporting requirements. To the right are approaches that provide the information for forward looking modeling and planning. IFAC rated RCA as the most mature costing approach short of doing full simulation, and simulation requires the techniques used in RCA. Copied from IFAC Information Paper: Evaluating The Costing Journey: A Costing Levels Continuum Maturity Model. Diagram from IFAC Information Paper: Evaluating The Costing Journey: A Costing Levels Continuum Maturity Model www.ifac.org RCA Institute All Rights Reserved

CAUSALITY ANALOGY Information Use Concepts Modeling Concepts Inputs: Resources Output: Information For Decisions CAUSALITY ANALOGY Information Use Concepts Modeling Concepts Operational Model Costed Baseline Optimization Information

CAUSALITY ANALOGY Information Use Concepts Modeling Concepts Inputs: Resources Output: Information For Decisions CAUSALITY ANALOGY Concepts Resource Managerial Objective Cost Responsiveness Traceability Capacity Work Attributability Homogeneity Integrated Data Orientation Information Use Concepts Modeling Concepts Concepts Avoidability Divisibility Interdependence Interchangeability Operational Model Costed Baseline Optimization Information Constraints Impartiality Congruence Constraints Objectivity Accuracy Verifiability Measurability Materiality

Basic RCA Model Structure Support Quantitative Resource Pools Definition of Material Causal Relationships Support Activities Primary Resource Pools Noncausal Costs (Excess Capacity Costs) Primary Activities To Illustrate: Here you have a productive process that creates 3 products. The correct way to handle a cost with a weak relationship to the output it to assign it to a level in the organization that can manage the cost – either by generating more sales or making the decision that it should be eliminated. If this isn’t done, product cost looks higher than it really is. Product/Service PROJ Objects Result Segments - Revenue Responsibility

Managerial Cost Object Types A Managerial Cost Object Collects Costs On The Basis Of The Consumption Of Processes And Resources Resource Centric Cost Centers [Orgs] Resource Pools [Similar Resources, Homogeneous Output] Business Process [Services] Product/Service Centric Projects/Events (ex. Minor Construction…) Orders (ex. Work, Maintenance, Service, Production, Job, Customers….) Results Centric Results Segments (Product/service Business Line – Product, Product Group, Family, Line, ...) PROJ PROD CC (ex. Dir/Div…) P&L RP SERV WO BPR 2/17/2019 6:34 PM © RCA Institute 2010 7

Resource Pool Resource Pools Are Groups Of “Like-minded” Resources Within An Organization That Produce A Homogeneous Output Product, Semifinished component, Maintenance Hour Primary Cost = Resource in the Pool Secondary Cost = Output from Supporting Resource Pools Resource Pool Cost Objects are Transitional Provide Output to another Cost Object 2/17/2019 6:34 PM © RCA Institute 2010 8

Basic RCA Model Structure Support Quantitative Resource Pools Definition of Material Causal Relationships Support Activities Primary Resource Pools Noncausal Costs (Excess Capacity Costs) Primary Activities To Illustrate: Here you have a productive process that creates 3 products. The correct way to handle a cost with a weak relationship to the output it to assign it to a level in the organization that can manage the cost – either by generating more sales or making the decision that it should be eliminated. If this isn’t done, product cost looks higher than it really is. Product/Service PROJ Objects Result Segments - Revenue Responsibility

Business Process Business Processes are the “work” or “task” being performed by a Resource Pool Typically related to an action, a “verb” Operate Machine, Conduct Setup, Process Vendor Invoices An expression/description of how the capacity is utilized A business process does not have capacity Two Uses: Provide information Modeling Cost Effectiveness Business Process Cost Objects are Transitional Provide Output to another Cost Object 2/17/2019 6:34 PM © RCA Institute 2010

Basic RCA Model Structure Support Quantitative Resource Pools Definition of Material Causal Relationships Support Activities Primary Resource Pools Noncausal Costs (Excess Capacity Costs) Primary Activities To Illustrate: Here you have a productive process that creates 3 products. The correct way to handle a cost with a weak relationship to the output it to assign it to a level in the organization that can manage the cost – either by generating more sales or making the decision that it should be eliminated. If this isn’t done, product cost looks higher than it really is. Product/Service PROJ Objects Result Segments - Revenue Responsibility

Project Objects An object used to plan, collect, monitor, and settle costs for internal or external Project. Projects normally have a definite start and end. External projects normally part of a Results Segment. Internal projects may or may not be, but provides resource capacity use accountability. 2/17/2019 6:34 PM © RCA Institute 2010

Basic RCA Model Structure Support Quantitative Resource Pools Definition of Material Causal Relationships Support Activities Primary Resource Pools Noncausal Costs (Excess Capacity Costs) Primary Activities To Illustrate: Here you have a productive process that creates 3 products. The correct way to handle a cost with a weak relationship to the output it to assign it to a level in the organization that can manage the cost – either by generating more sales or making the decision that it should be eliminated. If this isn’t done, product cost looks higher than it really is. Product/Service PROJ Objects Result Segments - Revenue Responsibility

Order Object Types Cost Objects Used To Plan, Collect, Monitor, And Settle The Costs Of Specific Jobs And Events. Orders Are Used To Monitor The Costs Of Short Term Projects And Event/Job Costing Examples: Sales Orders, Maintenance Orders, Job Orders, Event Orders. 2/17/2019 6:34 PM © RCA Institute 2010 14

Basic RCA Model Structure Support Quantitative Resource Pools Definition of Material Causal Relationships Support Activities Primary Resource Pools Noncausal Costs (Excess Capacity Costs) Primary Activities To Illustrate: Here you have a productive process that creates 3 products. The correct way to handle a cost with a weak relationship to the output it to assign it to a level in the organization that can manage the cost – either by generating more sales or making the decision that it should be eliminated. If this isn’t done, product cost looks higher than it really is. Product/Service PROJ Objects Result Segments - Revenue Responsibility

Result Segment A combination of different reporting dimensions used to represent costing data for various result levels. The final output or collection of cost objectives. Includes Revenue and Costs for each segment. Result segments can be referred to as ‘management tiers’ sorted by related cost model objects such as: Resources used for a Product/Service Product Groups / Regional Areas Business Units / Divisions Corporate Entity 2/17/2019 6:34 PM © RCA Institute 2010

Result Segment Results Segment Reporting With Management Tiers (Tiers Are Company Specific) That Can Facilitate A Manager’s Objectives For Analysis Control Optimization 2/17/2019 6:34 PM © RCA Institute 2010 17

Result Segments For example: Revenue –(minus) Raw Material Product costs = Margin 1 –(minus) Proportional Product conversion costs = Margin 2 –(minus) Fixed Product conversion costs = Margin 3 = Product Segment Results –(minus) Product Region Distribution costs = Margin 4 = Regional Segment Results –(minus) Corporate R&D costs = Margin 5 = Corporate Entity Segment Results 2/17/2019 6:34 PM © RCA Institute 2010 18

Basic RCA Model Structure Support Quantitative Resource Pools Definition of Material Causal Relationships Support Activities Primary Resource Pools Noncausal Costs (Excess Capacity Costs) Primary Activities To Illustrate: Here you have a productive process that creates 3 products. The correct way to handle a cost with a weak relationship to the output it to assign it to a level in the organization that can manage the cost – either by generating more sales or making the decision that it should be eliminated. If this isn’t done, product cost looks higher than it really is. Product/Service PROJ Objects Result Segments - Revenue Responsibility

www.RCAInstitute.org lwhite@rcainstitute.org 757 288 6082