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RCA Discussion: RCA Modeling, Part 2

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Presentation on theme: "RCA Discussion: RCA Modeling, Part 2"— Presentation transcript:

1 RCA Discussion: RCA Modeling, Part 2
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) 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 RCA Resource view Advantages Process view GPK ABC Capacity Analysis and Management Process Analysis and Management Capacity-Focused Activity-Focused

3 RCA Recognition Activity Based Costing Traditional Standard Costing
The International Federation of Accountants completed an International Good Practice Guide on Costing in July 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 RCA Institute All Rights Reserved

4 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

5 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

6 Resources

7 Define as Resource Pools Based on Output (and Capability)

8 Model Resource Relationships
Output

9 Responsiveness Prod Line A Prod Line B

10 Relationship of Resources to Output & Summarize
Primary Consumption Relationships

11 Relationship of Resources to Output
Primary Consumption Relationships

12 RCA Information

13 Define as Resource Pools Based on Output (and Capability)

14 Trace Consumption Relationships between Resource Pools
Secondary Consumption Relationships Primary Consumption Relationships

15 RCA Information

16 Summarize Secondary Consumption Relationships Primary Consumption

17 Presentation at MESA US Conference Metrics Makeover Contest
RCA Storyboard Presentation at MESA US Conference Metrics Makeover Contest The Model works because it is based on the flow of: resources and Quantity flows and the movement of the quantities are then layered with the monetary system or systems of choice This is able to best identify resource constraints as well as cost contraints. It is about modeling for decision support not just a dashboard.

18 Get Well Plant Manufacturing Clean Room
Line 2 No Pane, Burn away , Better beat, or relief capsules Manual Additions Pill weigh & Press Pill Coat Print Blister or Bottle, weigh &inspect Storage & Material Product Testing & Storage Seal, Package, inspect inspect Weigh & capsule Weigh and Mix To Distribution Get well production clean room. Produces 4 pills. Millions of some, hundreds of thousand of one. Doesn’t really matter since I want to focus on the modeling and the information RCA produces about the facility. Prod 1 old, depreciated. Prod 2 new. Packaging on both lines very similar equipment. Pill weigh &Press Product Testing & Storage Bottle, weigh &inspect Seal ,Package, inspect inspect Weigh and Mix Weigh & capsule Line 1 Burn away or relief capsules

19 Support Resource pools.
No Pane Better Beat Support Resource pools. Facility Electricity, Facility – Sq FT, system support, Maintence labor Notice resource quantities. This is the planned theoretical output for the pools. The distribution RP a direct input to product, but uses support resources. How do we build an RCA model? Options…..Each machine as a resource pool…possible if the data supports it. What level of aggregation? Much would depend on the strategic objecives and types of decisions the company needed to make. You’ll see we’ve chosen an approach, but it is not the only approach. Burn Away Relief

20 Line 1 Made line 1 a Cost Center with 2 Resource pools Labor and Machines. Why? They have very different characteristics. Labor has much less c capacity in the current state than machines which are 7X24. Substantial union issues also. Note that the relationships with the support resource pools are also mapped. This mapping is done based on the quantites, not cost of the support output or managerial objectives consumed.

21 Line 2 Same for Line 2. Remember Line 2 is substantially newer. A reason to separate line 1 and 2. if they were roughly the same capability, we could consider 1 RP for them. Alternatively we could break this CC into more resource pools if needed.

22 Packaging The packaging section of both lines was made into 1 Cost center. Perhaps the labor is available to both lines. Again the labor and machines are made into separate resource pools for the same reasons as before. The same support RPs are shown with the consumption relationships.

23 No Pane Better Beat Now you see the consumption relationships among the support resource pools and the relationships to distribution. What you’ve seen in each case is the primary relationships in the box and the secondary relationships illustrated with arrows. Now these relationships need to be solved to understand the impact of the primary and secondary inputs. Burn Away Relief

24 Line 1 This which you’ve seen before becomes…..

25 Line 1 This. Let’s examine. Primary consumption is on top. The secondary consumption shows the quantities provided and the associated cost. Note the fixed and proportional characteristics are provided. Now Please remember at the same time we solved line 1 we solved all the relationships….I just can’t show it all on one page at the same time.

26 Line 2 Line 2 becomes

27 Line 2

28 Packaging Packaging becomes.

29 Packaging

30 No Pane Better Beat The support resource pools and the distribution resource pool become….. Burn Away Relief

31 No Pane Better Beat Next I want to examine the information a little. But does this give you a sense of the type of quantity and cost information that is being produced about the organization’s operations. I will acknowledge there are a lot of situations not covered in this illustration, and I’ll itemize these a bit in a few minutes. What I’d like to do is illustrate some uses of this information with you. Burn Away Relief

32 RCA Institute All Rights Reserved
Decision Should you outsource maintenance for $30/hr? First a straight forward example: Total cost is $33.04/ hr. But Simple answer is proportional cost is $22.56, that’s all you’ll save, so no. But I like to look at each resource input individually and consider. Will you retain the supervisor to manage the contracted maintenance provider? Will you be maintaining the shop equipment that causes depreciation? Is there an alternative use for the space? What will be the system impact if over the long run 3 IT nodes aren’t needed? Some times elimination of a resource pool is outside the parameters of the original model, but even then you have a solid checklist from which to start an analysis. RCA Institute All Rights Reserved

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


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