Management And Accounting Web

Keys, D. E. and A. van der Merwe. 2002. Gaining effective organizational control with RCA. Strategic Finance (May): 41-47.

Summary by Renauri Castro
Master of Accountancy Program
University of South Florida, Fall 2004

ABC Main Page | ABM Main Page | German Accounting Main Page

According to Keys an van der Merwe, resource consumption accounting (RCA) is a control solution with a focus on actual versus predicted results that will surpass ABC/ABM. They state that ABC/ABM based on the CAM-I cross, while somewhat effective, has several shortcomings. The main problem is that the focus of ABC/ABM is too narrow in that these methods ignore the various levels of management and the layers or tiers within those levels. RCA, on the other hand is based on a cube that recognizes all these levels and layers within the organization. The comprehensive nature of RCA is indicated in the discussion and illustrations below.

The RCA Control System

RCA has four control mechanisms including:

Management planning and control tiers,
Authorized reporting,
A reflective view of operations, and
Extensive variance analysis.

Management Planning and Control Tiers

As indicated in the adaptation of Figure 1 below, RCA recognizes three levels of management (strategic, tactical and operational) and four management planning and control tiers (resource tier, process/activities or value chain tier, product/service tier, and market segment or results tier). According to Keys and van der Merwe, the RCA cube provides a potential alternative to the CAM-I cross.

Resource Consumption Accounting Cube -  Basis for a Planning & Control System

Authorized Reporting

Another difference between ABC/ABM and RCA is the introduction of authorized reporting (See Tables 1 and 2 below). Authorized reporting is similar to flexible budgeting. It allows for activity budgeted costs to shift up or down (flex) according to the market environment throughout the period. Using authorized costs to compare budgeted costs with actual costs provides a better basis for developing variances. Authorized reporting combined with the different planning and control tiers ensures that all areas of a company receive relevant performance information. The different tiers can accurately reflect the different factors that affect them in developing the authorized reports. The example presented in the tables below illustrates the main concepts related to authorized reporting.

Table 1: Planned Output and Unit Standards to be Used for Authorized Reporting

Plan/Actual/ Static Variance Report Resource Pool: Apron Services

Output:
Equipment Hours
Planned Quantity: 10,000
Actual Quantity: 9,000
Primary Costs Plan Fixed Plan Prop Actual Variance
Diesel Fuel $0 $40,000 $37,000 ($3,000)
Depreciation 25,000 0 25,000 0
Quantity Consumption
Secondary Costs Plan Fixed Plan Prop Actual
Equipment
Maintenance
100 1,000 1,050 12,500 15,000 26,250 (1,250)
$37,500 $55,000 $88,250 ($4,250)


Table 2: Authorized Report for an Apron Service Resource Pool
Authorized Report Resource Pool: Apron Services Output: Equipment Hours Planned Quantity: 10,000 Actual Quantity: 9,000
Primary Costs Authorized Actual Variance
Diesel Fuel $36,000 $37,000 $1,000
Depreciation 25,000 25,000 0
Quantity Consumption      
Secondary Costs Authorized Actual      
Equipment Maintenance 1,000 1,050 25,000 26,250 1,250
      $86,000 $88,250 $2,250

A Reflective View of Operations

RCA also provides a reflective view of operations, i.e., real-time performance measurements. This view allows users to focus on what is going on right now, not just historical data or predictive data. These real-time measurements allow managers to look at the cost and profitability of activities at the time they are taking place.

Extensive Variance Analysis

RCA has very detailed and broad variance analysis capabilities that supports analysis at each planning and control tier. First, it allows for both input side and output side variance analysis by using a debit and credit method. A variance in the input side may be treated as a credit to input and a debit to output (See Tables 4 and 5 below). Second, RCA allows for the classification of controllable versus uncontrollable variances. For example, quantity used is controllable while price may not be controllable. Also the same item may be controllable in one tier but uncontrollable in another tier.

Table 4: An ACP For an Activity With Actual Costs
Plan/Actual/ Static Variance Report
Activity: Prepare Aircraft A7X7
Driver: # Aircraft Turnarounds
Planned Quantity: 5,000
Actual Quantity: 5,500
Primary Costs Plan Fixed Plan Prop Actual Variance
N/A $0 $0 $0 $0
Quantity Consumption        
Secondary Costs Plan Fixed Plan Prop Actual        
Fuel 0 2,500 2,750 500,000 50,000 605,000 55,000
Water 0 1,000 1,090 100,000 20,000 130,800 10,800
Service 0 1,500 1,650 150,000 75,000 264,000 39,000
Totals $750,000 $145,000 $999,800 $104,800
Activity Planned Cost Rates $150 $29    

Table 5: Authorized Report and Variance for the Prepare Aircraft Activity

Authorized Cost Report and Variances

Activity: Prepare Aircraft A7X7

Output: # Aircraft Turnarounds
Planned Quantity: 5,000
Actual Quantity: 5,500
Input Side
Primary Costs
Authorized Actual Variance Category
N/A $0 $0 $0 -
  Quantity Consumption        
Secondary Costs Authorized Actual        
Fuel 2,750 2,750 605,000 605,000 0 -
Water 1,100 1,090 132,000 130,800 (1,200) Input Quantity
Service 1,650 1,650 247,500 264,000 16,500 Input Price
Totals $984,500 $999,800 $15,300 Total Var.
Output Side
Cost Recover
984,500 984,500 0 -
Under Absorption 0 15,300 15,300 Output Price

Finally, the authors emphasize the need for learning and an understanding of the system by everyone involved. There must be accountability from everyone in the company based on an accurate determination of responsibility for variances, particularly related to excess or idle capacity. RCA is not only a method of defining and finding variances, but a tool for investigation and corrective action with a focus on control and organizational learning.

______________________________________________

Related summaries:

Gaiser, B. 1997. German cost management systems. Journal of Cost Management (September/October): 35-41. (Summary).

Gaiser, B. 1997. German cost management systems (part 2). Journal of Cost Management (November/December): 41-45. (Summary).

Keys, D. E. and A. van der Merwe. 1999. German vs. U.S. cost management. Management Accounting Quarterly (Fall): 19-26. (Summary).

Sharman, P. A. 2003. Bring on German cost accounting. Strategic Finance (December): 30-38. (Summary).

Van der Merwe, A. and D. E. Keys. 2002. The case for resource consumption accounting. Strategic Finance (April): 31-36. (Summary).