The Case for Resource Consumption Accounting: It Can Give You a More Accurate Projection of the Resources You Need and Their Costs Than Traditional Methods Can. (Cost Management)

By Merwe, Anton Van Der; Keys, David E. | Strategic Finance, April 2002 | Go to article overview

The Case for Resource Consumption Accounting: It Can Give You a More Accurate Projection of the Resources You Need and Their Costs Than Traditional Methods Can. (Cost Management)


Merwe, Anton Van Der, Keys, David E., Strategic Finance


Resource consumption accounting (RCA) is a comprehensive, fully integrated cost management system. It's an approach to management accounting that leverages the best of the last several decades of developments in the discipline in Europe and the U.S. As one example, RCA effectively blends the robust German cost management system (GPK) with activity-based costing (ABC). This merger of the best of two worlds provides an integrated and comprehensive approach to management accounting.

Three pillars are key to resource consumption accounting: the view of resources, the view of the nature of cost, and a quantity-based approach to cost modeling. As a comprehensive, integrated system based on this new foundation, RCA has a ripple effect throughout the entire enterprise management process. For example, we'll show you a practical application of resource consumption accounting planning and control principles in tandem with activity-based costing and activity-based budgeting (ABB). We'll also look at the potential that RCA holds for the process of planning and control in an enterprise. This first article addresses the management process of planning. A second article will address organizational control.

ACTIVITY-BASED BUDGETING

Activity-based budgeting (ABB) has been hailed as the remedy for many a budget ailment because it uses the activities in the value chain as the mechanism to convert anticipated levels of activity output into monetary equivalents. For example, Table 1 gives details of how cabin crew staff are used on two aircraft types for an airline's current flight timetable. Note that the A7Y7 is a larger airplane and requires more cabin crew per flight. The actual total expense in the general ledger (G/L), traditionally used for ABC. modeling, corresponds to the flight hours in Table 1 as $10.6 million. This number is composed of $9 million (cabin crew salaries and benefits), $1 million (allowances), and $600,000 (allocated costs).

Figure 1 shows the ABB planning process for the airline using the costs from the G/L and the information from Table 1. First, in the top half of Figure 1, the fulltime equivalents (FTEs) are used to split the $10,600,000 of cabin crew cost between the activities for each aircraft type. This results in costs of $4,240,000 and $6,360,000 per activity as shown. The cabin crew activity for the A7X7 has a rate of $424/flight hour ($4,240,000/10,000) and, for the A7Y7, $1,272/flight hour ($6,360,000/5,000).

Next, these actual cost rates are used in the activity-based budgeting process to calculate a budget for the future period as shown in the bottom half of Figure 1. The planned flight timetable calls for 7,500 flight hours for each of the aircraft types. Within ABC, the cabin crew activities are considered unit related and their costs variable. The planned costs for the future period for the A7X7 and A7Y7 will therefore be $3,180,000 ($424 x 7,500 flight hours) and $9,540,000 ($1,272 x 7,500 flight hours), respectively. The total planned costs for cabin crew for the planned flight hours are calculated as $12,720,000.

SHORTFALLS OF TRADITIONAL ABB

Activity-based budgeting falls short in three areas:

* First, the approach doesn't adequately consider the fixed costs on unit-related activities. ABB assumes all costs of these activities to be variable. Yet every activity/process inherits the nature of the cost of the resource that executes it, and very few, if any, activities contain zero fixed costs. (Practitioners have adopted various approaches to address the fixed cost problem. An interview with Robert Eiler of Price-waterhouseCoopers revealed tagging of accounts, e.g., depreciation, as fixed. "Fixed accounts" aren't increased/decreased in proportion to activity driver increases/decreases, respectively. But these approaches leverage the traditional ABC mapping method and aren't considered comprehensive solutions to the problem. …

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