Resource consumption accounting

Last updated

Resource Consumption Accounting (RCA) is a management theory describing a dynamic, integrated, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA is a relatively new management accounting approach based largely on the German management accounting approach Grenzplankostenrechnung (GPK) and also allows for the use of activity-based drivers.

Contents

Background

RCA emerged as a management accounting approach beginning around 2000, and was subsequently developed at CAM-I (The Consortium of Advanced Management, International) in a Cost Management Section RCA interest group [1] commencing in December 2001. Over the next seven years RCA was refined and validated through practical case studies, industry journal publications, and other research papers.

In 2008, a group of interested academics and practitioners established the RCA Institute [2] to introduce Resource Consumption Accounting to the marketplace and raise the standard of management accounting knowledge by encouraging disciplined practices.

By July 2009, Professional Accountants in Business (PAIB) [3] Committee of International Federation of Accountants (IFAC), recognized Resource Consumption Accounting in the International Good Practice Guidance (IGPG) publication called Evaluating and Improving Costing in Organizations [4] and its companion document, Evaluating the Costing Journey: A Costing Levels Continuum Maturity Model. The guide focuses on universal costing principles and with the Costing Levels Maturity Model [5] acknowledges RCA attains a higher level of accuracy and visibility compared to activity based costing for managerial accounting information when the incremental benefits of RCA's better information exceed the incremental administrative effort and cost to collect, calculate and report its information.

As stated in the International Good Practice Guidance, [4]

"A sophisticated approach at the upper levels of the continuum of costing techniques provides the ability to derive costs directly from operational resource data, or to isolate and measure unused capacity costs. For example, in the resource consumption accounting approach, resources and their costs are considered as foundational to robust cost modeling and managerial decision support, because an organization’s costs and revenues are all a function of the resources and the individual capacities that produce them."

— International Federation of Accountants, 2009

Resource Consumption Accounting was also recognized in a Sustainability Framework Report issued by the International Federation of Accountants (IFAC), for having the capability of helping organizations "improve their understanding of environmental (and social) costs through their costing systems and models". [6] This Sustainability Framework [7] highlights RCA under the sub-heading Improving Information Flows to Support Decision and informs readers that proper cost allocation can be built ‘directly into the cost accounting system’, thereby enhancing an organization's performance for "identifying, defining and classifying costs in a useful way". [6]

Concepts of Resource Consumption Accounting

RCA concepts that distinguish it from other management accounting approaches include the following:

  1. Germany’s GPK method of quantity-based operational modeling using fixed and proportional costs established at the resource level in a company (i.e., cost center/resource pools or value streams"); [8]
  2. Gordon Shillinglaw’s [9] concept of attributable cost; [10]
  3. Flexible use of activity-based drivers (only where needed) based on specific, and restrictive rules;
  4. Value chain integration [11] of management accounting into operational systems;
  5. Use of fundamental operations transactions as the primary source for financial and quantitative data (rather than the general ledger);
  6. Replacing the principle of variability with the principle of responsiveness for operational modeling; [12]
  7. Support for a multi-level, contribution margin-based profit & loss statement that supports managerial decision-making without the cost distortions and complexity of inappropriate (not based on the principle of causality) allocations of cost.

The Core Elements of RCA

There are three core elements that enable RCA to lay a very different foundation for its cost model. [13]

Additional information

The goals of the RCA Institute, in promoting the acquisition of knowledge and skills to apply RCA, include the following:

The RCA Institute library contains an annotated bibliography that is currently divided into four sections:
  1. RCA theory,
  2. management accounting landscape and management accounting philosophy,
  3. RCA related research and
  4. other materials.

This annotated bibliography provides more information for recommended reading and some guidance on how to get the most out of the information that is there.

Related Research Articles

<span class="mw-page-title-main">Accounting</span> Measurement, processing and communication of financial information about economic entities

Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non-financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of stakeholders, including investors, creditors, management, and regulators. Practitioners of accounting are known as accountants. The terms "accounting" and "financial reporting" are often used as synonyms.

<span class="mw-page-title-main">Cost accounting</span> Procedures to optimize practices in cost efficient ways

Cost accounting is defined by the Institute of Management Accountants as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs". Often considered a subset of managerial accounting, its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

<span class="mw-page-title-main">Management accounting</span> Field of business administration, part of the internal accounting system of a company

In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.

<span class="mw-page-title-main">Certified Management Accountant</span>

Certified Management Accountant (CMA) is a professional certification credential in the management accounting and financial management fields. The certification signifies that the person possesses knowledge in the areas of financial planning, analysis, control, decision support, and professional ethics. There are many professional bodies globally that have management accounting professional qualifications. The main bodies that offer the CMA certification are:

  1. Institute of Management Accountants USA;
  2. Institute of Certified Management Accountants (Australia); and
  3. Certified Management Accountants of Canada.

Managerial economics is a branch of economics involving the application of economic methods in the organizational decision-making process. Economics is the study of the production, distribution, and consumption of goods and services. Managerial economics involves the use of economic theories and principles to make decisions regarding the allocation of scarce resources. It guides managers in making decisions relating to the company's customers, competitors, suppliers, and internal operations.

<span class="mw-page-title-main">Managerial finance</span>

Managerial finance is the branch of finance that concerns itself with the financial aspects of managerial decisions. Finance addresses the ways in which organizations raise and allocate monetary resources over time, taking into account the risks entailed in their projects; Managerial finance, then, emphasizes the managerial application of these finance techniques and theory.

<span class="mw-page-title-main">Activity-based costing</span> Method of apportioning costs

Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more indirect costs (overhead) into direct costs compared to conventional costing.

<span class="mw-page-title-main">Throughput accounting</span> Principle of management accounting

Throughput accounting (TA) is a principle-based and simplified management accounting approach that provides managers with decision support information for enterprise profitability improvement. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting. As such, Throughput Accounting is neither cost accounting nor costing because it is cash focused and does not allocate all costs to products and services sold or provided by an enterprise. Considering the laws of variation, only costs that vary totally with units of output e.g. raw materials, are allocated to products and services which are deducted from sales to determine Throughput. Throughput Accounting is a management accounting technique used as the performance measure in the Theory of Constraints (TOC). It is the business intelligence used for maximizing profits, however, unlike cost accounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, Throughput Accounting primarily focuses on generating more throughput. Conceptually, Throughput Accounting seeks to increase the speed or rate at which throughput is generated by products and services with respect to an organization's constraint, whether the constraint is internal or external to the organization. Throughput Accounting is the only management accounting methodology that considers constraints as factors limiting the performance of organizations.

<span class="mw-page-title-main">Project accounting</span> Accounting systems geared toward project management

Project accounting is a type of managerial accounting oriented toward the goals of project management and delivery. It involves tracking, reporting, and analyzing financial results and implications, and sometimes the creation of financial reports designed to track the financial progress of projects; the information generated by this analysis is used to aid project management.

Managerial Risk Accounting is concerned with the generation, dissemination and use of risk related accounting information to managers within organisations to enable them to judge and shape the risk situation of the organisation according to the objectives of the organisation.

Human Resource Accounting (HRA) is the process of identifying and reporting investments made in the human resources of an organisation that are presently unaccounted for in the conventional accounting practice. It is an extension of standard accounting principles. Measuring the value of the human resources can assist organisations in accurately documenting their assets. In other words, human resource accounting is a process of measuring the cost incurred by the organisation to recruit, select, train, and develop human assets.

Demand forecasting refers to the process of predicting the quantity of goods and services that will be demanded by consumers at a future point in time. More specifically, the methods of demand forecasting entail using predictive analytics to estimate customer demand in consideration of key economic conditions. This is an important tool in optimizing business profitability through efficient supply chain management. Demand forecasting methods are divided into two major categories, qualitative and quantitative methods. Qualitative methods are based on expert opinion and information gathered from the field. This method is mostly used in situations when there is minimal data available for analysis such as when a business or product has recently been introduced to the market. Quantitative methods, however, use available data, and analytical tools in order to produce predictions. Demand forecasting may be used in resource allocation, inventory management, assessing future capacity requirements, or making decisions on whether to enter a new market.

<span class="mw-page-title-main">Sustainability accounting</span>

Sustainability accounting was originated about 20 years ago and is considered a subcategory of financial accounting that focuses on the disclosure of non-financial information about a firm's performance to external stakeholders, such as capital holders, creditors, and other authorities. Sustainability accounting represents the activities that have a direct impact on society, environment, and economic performance of an organisation. Sustainability accounting in managerial accounting contrasts with financial accounting in that managerial accounting is used for internal decision making and the creation of new policies that will have an effect on the organisation's performance at economic, ecological, and social level. Sustainability accounting is often used to generate value creation within an organisation.

Grenzplankostenrechnung (GPK) is a German costing methodology, developed in the late 1940s and 1950s, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service. The term Grenzplankostenrechnung, often referred to as GPK, has been translated as either Marginal Planned Cost Accounting or Flexible Analytic Cost Planning and Accounting.

<span class="mw-page-title-main">RCA open-source application</span>

RCA Open-Source Application (ROSA) is an open-source management accounting application that aims to provide decision-support information to managers. Resource consumption accounting (RCA) is a principle-based approach to management accounting that combines German management accounting techniques known as Grenzplankostenrechnung (GPK) with a disciplined form of activity-based costing.

<span class="mw-page-title-main">Roger W. Mills</span> British economist

Roger W. Mills is a British economist working in the area of corporate finance. Emeritus professor at Henley Business School University of Reading, the Group chairman at Value Focus Group, a group of consulting firms, Chief Instructor and Chairman of the British Shito Ryu Karate Association (BSKA), 8th Dan (Kyoshi).

Management accounting in supply chains is part of the supply chain management concept. This necessitates planning, monitoring, management and information about logistics and manufacturing processes throughout the value chain. The goal of management accounting in supply chains is optimizing these processes. This strategy focuses on supporting management.

<span class="mw-page-title-main">Management accounting principles</span> Management accounting case

Management accounting principles (MAP) were developed to serve the core needs of internal management to improve decision support objectives, internal business processes, resource application, customer value, and capacity utilization needed to achieve corporate goals in an optimal manner. Another term often used for management accounting principles for these purposes is managerial costing principles. The two management accounting principles are:

  1. Principle of Causality and,
  2. Principle of Analogy.
<span class="mw-page-title-main">Energy system</span> All components related to production, conversion, delivery, and use of energy

An energy system is a system primarily designed to supply energy-services to end-users. The intent behind energy systems is to minimise energy losses to a negligible level, as well as to ensure the efficient use of energy. The IPCC Fifth Assessment Report defines an energy system as "all components related to the production, conversion, delivery, and use of energy".

<span class="mw-page-title-main">Institute of Certified Management Accountants of Sri Lanka</span> Sri Lankan professional body

The Institute of Certified Management Accountants of Sri Lanka, is a professional body offering qualification in management accountancy in Sri Lanka.

References

Footnotes

  1. ↑ "Cost Management Section – RCA Interest Group". Archived from the original on 2017-10-07. Retrieved 2008-09-05.
  2. ↑ "Home". RCAInstitue.org. Archived from the original on 2021-08-30. Retrieved 2021-10-23.
  3. ↑ "International Center for Professional Accountants in Business". Archived from the original on 2011-08-26. Retrieved 2009-06-06.
  4. 1 2 Professional Accountants in Business (July 2009). "Evaluating and Improving Costing in Organizations" (PDF). International Good Practice Guidance. Professional Accountants in Business Committee,International Federation of Accountants: 42. Archived (PDF) from the original on 2012-05-24. Retrieved 2009-08-21.{{cite journal}}: |author= has generic name (help)
  5. ↑ Professional Accountants in Business (July 2009). "Evaluating the Costing Journey: A Costing Levels Continuum Maturity Model" (PDF). Information Paper. Professional Accountants in Business Committee,International Federation of Accountants: 19. Retrieved 2009-08-21.{{cite journal}}: |author= has generic name (help)
  6. 1 2 "Sustainability Framework – Internal Management". Archived from the original on 2010-12-21. Retrieved 2009-06-05.
  7. ↑ "IFAC Sustainability Framework". Archived from the original on 2009-02-15. Retrieved 2009-06-06.
  8. ↑ Friedl, Gunther; Hans-Ulrich Kupper and Burkhard Pedell (2005). "Relevance Added: Combining ABC with German cost accounting". Strategic Finance (June): 56–61.
  9. ↑ "My Columbia: Professor Gordon Shillinglaw". www.columbia.edu. Retrieved 2023-05-10.
  10. ↑ Shillinglaw, Gordon (1963). "The Concept of Attributable Costs". Journal of Accounting Research. 1 (Spring): 73–85. doi:10.2307/2489843. JSTOR   2489843.
  11. ↑ Value chain integration (i.e., a quantitative model in the operational systems) eliminates dependency on the General Ledger for managerial decision-making. General Ledgers are primarily a tool for financial reporting in accordance with generally accepted accounting principles. (GAAP reporting is specifically designed for external stakeholders – creditors and investors, not internal managers – and external comparisons associated with investing activities.) "RCA Institute – FAQ's". Archived from the original on 2019-04-21. Retrieved 2008-09-05.
  12. ↑ Van der Merwe, Anton (Sep–Oct 2007). "Management Accounting Philosophy Series II: Cornerstones of Restoration". Journal of Cost Management. 21 (5): 26–33. ISSN   1092-8057.
  13. ↑ "RCA Institute – About RCA". Archived from the original on 2019-04-21. Retrieved 2008-09-05.

Sources

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.