Executive Director's Message
Welcome to the Third Quarter 2010 RCA Institute Newsletter.
Resource Consumption Accounting continues to generate significant interest in the US and internationally. While the economic downturn has hindered investment, it has generated a new interest in process improvement and cost control in companies. Daily you hear the US media asking, “Where is the job growth?” I think it’s becoming clear that many companies are doing more with less.
Companies are optimizing. They are guided by operational necessity and constrained cash flow – immediate and uncompromising feedback. The question I continually ask myself is, “Will companies be able to maintain their efficiency as the economy recovers and they start to expand?”
The role of management accounting is providing the decision support information to facilitate efficient and effective enterprise management. Growth can be challenging, since the pressure moves from the bottom line to the top line and cost control is viewed less critically. This challenge is especially difficult in smaller companies that often lack the staff depth, expertise, and/or systems to manage costs in a fast-paced growth environment.
Many of the RCA Institute’s inquiries come from smaller companies where the controller or CFO is much closer to operations. I’m encouraged by this interest in merging cost and operation information more effectively and systematically. One of the benefits of RCA is that it provides principles, not just methods. Principles require thoughtful understanding, application, and analysis of business operations and strategy. Principles can change the way people think and shift organizational cultures in ways that methods and technical solution can never achieve.
I encourage RCA Institute members to share their view on their challenges and solutions for positioning their companies for sustainable cost management as the economy returns to strength.
Thank you for your membership in the RCA Institute and interest in RCA. Please don’t hesitate to contact me with your thoughts, ideas, and management accounting issues.
Larry R. White
Is RCA Complex and Costly to Implement?
Because RCA is based on the German management accounting approach, (Grenzplankostenrechnung or GPK) which is noted for having numerous cost centers, because RCA tracks fixed and proportional resource consumption and costs, and because RCA incorporates activity based costing methods, it has gained a reputation for being a complex and expensive undertaking. This conclusion needs to be examined from a perspective beyond the finance and accounting department’s view….which in accounting literature is often where a boundary on expertise and effort is drawn – often unconsciously.
An RCA model must reflect the flow of resources through an organization’s operations. Therefore, the creation of resource pools will necessarily align with operational performance information. The initial step in building an RCA model is to trace the flows of operational resource quantities; this is done before any financial data is examined. Operational or production management systems often have extensive data on performance that is far more detailed than is needed for financial statement costing. Additionally, operations personnel normally struggle to attach costs to their operating performance improvements. The promise that RCA can provide cost information clearly linked to operating performance information can be very motivating to operations personnel. Remember, RCA also traces operational resource flows with fixed and proportional consumption relationships which will translate directly into the flow of money. With strong operations support and integration, RCA implementation and model maintenance can be significantly less challenging than the finance department alone may have envisioned.
A second mitigating fact is that RCA establishes standards for the operational resource flows and consequently the costs associated with them. Standards, once set and agreed upon, allow for effective communication especially when evaluating scenarios, conducting business planning, or selecting from decision options. The establishment and periodic evaluation of standards provide another opportunity for achieving organizational understanding of operational resources, their employment, and their costs. RCA’s creation of operational resource consumption standards and matching cost standards are a necessary step in the evolution from control to optimization to business simulation. Simulation cannot know the future, it can only know the present and then provide a range of scenarios based on assumptions of the future. Standards should reflect the best assumption of the immediate future with present capabilities…..this is where longer range planning for the future must begin.
Third, the depth of information RCA can provide should be matched to the organization’s decision support needs. RCA is flexible in its creation of resource pools. For example, a production line in a truly lean environment could be considered a single resource pool, a mega-machine. The level of detail depends on an organization’s optimization needs and the types of optimization decisions it anticipates it will make.
Fourth, activity or process measures are used in RCA only when they add significant informational value for decision support or where they are more cost effective to monitor than direct resource pool to resource pool assignments. Activity measures can also be used for limited time periods such as when a problem is suspected or during a process improvement effort.
The four issues presented here don’t make RCA simple; however, I hope they demonstrate that RCA need not be as complex or intensive as many financial professionals may fear. Much of the complexity boils down to a simple question: How complex is your organization? A simple model will not provide the information necessary for a complex organization to make effective decisions. If you have undertaken business process improvement efforts such as lean and simplified your processes, your management accounting and decision support system should also reflect the fruit of that effort. It is also interesting to note that the German management accounting approach, GPK, is normally characterized as highly complex. However, research by the Institute of Management Accountants shows clearly that GPK has been sustained by 3,000+ German companies and achieves much, much higher satisfaction ratings from German financial executives as a business strategic tool than any costing approach does with U.S. financial executives.
Finally, questions associated with gaps in your decision support information need to be considered.
- What is the cost of uncertainty about operations and their costs?
- How much effort does your organization spend conducting special studies and analyses to sort out cost and ROI information?
- Do you work from facts and data or are many issues resolved with negotiation and uncomfortable compromises?
- Does the lack of solid, factual information impede your organization’s nimbleness and effectiveness in the marketplace?
RCA can provide a solid baseline for decision support that will bridge the gap between operations, finance, and organizational strategy.
Recent RCA Articles and Presentations
Two new articles came out over the past quarter that relate to the practice of RCA.
AutomationWorld, a manufacturing industry publication began publishing a bimonthly column called The Finance View. Automation World is a free publication with a circulation of 65,000 readers. It is available in both a print and online version. RCA Institute Director, Larry White, will be the columnist. The first column, "Financial Information for Operations: Mission Impossible?" describes some of the causes of the challenges operating personnel have with the financial performance information they are typically provided.
Cost Managementmagazine published the article, GPK: Cracks In The Silver Bullet?,in the July/August issue. This article examines the management accounting needs of current business environment and evaluates two management accounting approaches, GPK and RCA, to determine how they address today’s decision support needs. It presents management accounting’s evolution from control, to optimization, to simulation and examines the demands this places on management accounting and decision support information.
Resource Consumption Accounting Open Source Application (ROSA)
This open source application is still available for free download from RCA Institute member company, Alta Via Consulting. The link is: . The download includes a user manual which walks you through RCA data at the fictional Get Well Company. It also includes instructions, as well as a clean database and template to create your own RCA application.
I encourage you to examine this software and the manual to further your understanding of RCA and use the RCA Institute forum to share your experience. There is also a ROSA User Group established on Linked In which is monitored by the staff familiar with the software and its capabilities. . To locate ROSA User Group on LinkedIn, type in the search field “ROSA – RCA Open-Source Application Users Group”.
RCA Institute Member Forum
The RCA Institute Member Forum is now active for Institute members. You can access it via the RCA Institute Website under the Membership tab then click on Listserv.
Alternatively, you can send an email to:
(It is important that you respond to this specific email address in order for your message to be sent to the entire member community.)
To become a member of the Forum or confirm that you are a member of the forum, visit the Listserv page on the RCA Institute website (link above), and your status as a member is displayed at the bottom of the page. You can use the buttons to opt in or opt out of the forum.
I will start posting RCA related topics on the forum periodically and would value your feedback and interaction. I look forward from hearing from RCA Institute members using this new communication tool.
Manufacturing Enterprise Systems Association (MESA) Metrics Guidebook
In late June, the RCA Institute presented at the MESA North American Conference in Detroit as part of its role in drafting the update to the MESA Metrics Guide book.
The first presentation was an interactive forum on Metrics Challenges. This forum covered a range of topics, but one recurring point of frustration was the relevance of financial metrics as they are presented to manufacturing and operations personnel. The RCA concepts of modeling operations first, beginning with resource capacities, applying cause and effect relationships, and using the attributable cost where causal relationships are weak (no arbitrary allocations) were well received and contributed to a dynamic discussion . Members may be interested in reviewing the notes of this forum which were recently published to get some additional insight into the metrics challenges faced by a group of manufacturing personnel.
The RCA Institute also gave an independent presentation on how RCA can help address metrics challenges and frustration with tradition financial information.
Federal Accounting Standards Advisory Board (FASAB) Managerial Accounting Initiatives
Managerial accounting made a brief comeback on the FASAB agenda after a multi-year absence. The Board conducted a survey to determine how agencies were generating cost accounting information; and then in June held a FASAB forum on “Managerial Cost Accounting: Requirements, Uses, and Best Practices”. Presentations focused on ABC and traditional approaches to determine the full cost of programs. Presentations are available to download at
RCA Institute Executive Director, Larry White, contacted FASAB and expressed concern that neither the surveys nor the presentations evaluated costing approaches for marginal costing capability which is critical to effective budgeting and correctly analyzing, pricing, and reporting the cost of cross servicing agreements between government agencies. He naturally highlighted RCA’s capability in this area.
In subsequent conversations with the staff, he discovered the FASAB had voted to terminate the management accounting project since it was focusing on improving management rather than the FASAB’s core mission which is financial statement reporting and presentation. FASAB sought OMB and Federal CFO Council support to continue the managerial costing project since improving cost systems and information for management purposes is more appropriate in their world of work, but neither was interested in supporting the effort.
The FASAB Staff did get approval to organize another educational session on cost accounting to be held in early 2011. This forum will examine methods other than ABC, and the RCA Institute has been tentatively invited to present.
Institute Members who work in government, let Executive Director, Larry White, , know if you are interested in attending, presenting, or collaborating on a presentation for this forum.
Profitability = Pricing + Cost Management
The RCA Institute has teamed with a company that specializes in pricing and profitability analytics, Tripod Associates LLC, to explore the benefits improved costing and management accounting decision support information can bring to the pricing and marketing side of the company.
Our plans call for a series of articles for accounting, manufacturing, and pricing association publications. A two part Webinar has recently been accepted by the IMA for February and March 2011. (See upcoming RCA presentation listing at the end of this newsletter.)
The description for the webinar is:
Profitability Management: Innovations in Pricing and Costing Analytics
Sustainable profitability requires constant attention to price setting, price realization, and costs; yet, an accurate and integrated analytical view of these areas has been elusive. Learn how an adapted pocket margin waterfall supplemented with Resource Consumption Accounting’s superior marginal cost information provides an innovative, practical, and holistic model to effectively manage your organization's profitability.
I’ll provide RCA Institute members more details once IMA publishes its 2011 Webinar Schedule.
Upcoming RCA Presentations
Confirmed Events:Organization / Topic / Location / Date / Link
American Institute of CPA’s Controller’s Workshop / Topic: Achieving Excellence in Cost Management – Resource Consumption Accounting / Hyatt Regency Grand Cypress, Orlando, FL / 10-11 Nov 2010 /
Institute of Management Accountants / Topic: Profitability Management: Innovations in Pricing and Costing Analytics, Part I / Webinar / 9 Feb 2011 / Not yet listed
Institute of Management Accountants / Topic: Profitability Management: Innovations in Pricing and Costing Analytics, Part II / Webinar / 16 Mar 2011 / Not yet listed.
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