Resource Consumption Accounting: Manager Focused Management Accounting

Resource Consumption Accounting: Manager Focused Management Accounting
Larry R. White, CMA, CFM, CPA, CGFM Executive Director, Resource Consumption Accounting Institute National Chairman of the IMA Board, Management Accounting is about Enterprise Optimization – supporting management decisions to achieve that in Enterprise Operations Multiple Philosophies, Approaches, Techniques: Activity-Based Costing, Lean Accounting, Theory of Constraints, etc. Multiple Failed Attempts for Operational Decision Support Information Inconsistent Usage of Basic Principles by the Various Options (Avoidable/Unavoidable, Fixed/Variable, etc.) NOISE – What To Do for What Purpose? Manager Confusion is at an All Time High Low Level of Knowledge About Management Accounting Compared With Financial Accounting Cluttered, Undisciplined Market for Management Accounting Solutions High Failure Rate No Reliable Standards Investments in Management Accounting Systems Considered High Risk. Although RCA’s Core Principles Are Well Proven (Over 3,000 Implementations) They Are Unfamiliar to the U.S. Market Other Approaches Have Been Down This Road In The U.S. and Highlighted What Needs to Be Avoided e.g., A Lack of Standards, A Free-For-All by Consultants and Software Vendors One Is Dealing With A Highly Skeptical Punch-drunk Decision Maker That Is At Least Twice Bitten and Now Thrice Shy

Agenda Resource Consumption Accounting I: Manager Focused Managerial Costing Introduction to RCA Management Accounting with a Manager Focus Principles and Concepts for a Manager Focus Resource Consumption Accounting II: Modeling and Applications Overview of RCA Modeling Applications & Case Results Options for supporting technology

Enterprise Financial Management
Tax Accounting Financial Accounting Source data capture (transactions) Managerial Accounting Non-financial data capture Cost Measurement Cost Accounting External financial Reporting e.g. GAAP, IFRS Performance Evaluation & Analysis Planning & Decision Support For example: Assessment of current strategy & plans Integrated cost/operational performance measures (e.g. cost variance, capacity measurement, process efficiency etc) Profitability reporting Process analysis Learning & corrective actions Costs of goods sold Inventory valuation For example: Fully absorbed and incremental costing Adaptive operation & cost based planning, budgeting & forecasting What-if analysis & planning Product, process, channel, & customer strategic adaptations Enterprise optimization (e.g. make vs. buy, outsource etc) Going back to this slide: For the next set of principles we’ll not be considering cost accounting for FR. The Domain of Costing Historical Predictive Lower Value-added to managerial decisions Higher 3

RCA Recognition Activity Based Costing Traditional Standard Costing 4
This diagram, without the Blue, orange, & green annotations, is from the International Federation of Accountants International Good Practice Guide titled Evaluating and Improving Costing in Organizations. It is described in a companion white paper written primarily by Gary Cokins and presents the levels of maturity in Costing. The real gains as you move from traditional standard costing to meet financial reporting requirements to more advanced approaches are gains in planning and resource capacity information. This continuum isn’t a progression. RCA uses some ABC techniques, but has many similarities with Standard Costing. Simulation requires many of the techniques used in RCA since actual financial information tends to be very lumpy and requires the use of standards to connect it with operational information which is real time. The other subtle thing that happens as you move up the costing continuum is you typically become constrained by your GL as a data source. Think about the GL – Its all Dollars and Account numbers, no Operational information. ABC isn’t as widely used as was originally hoped in large part because of the work of reconnecting GL dollars with operational drivers. The GL’s primary use is GAAP Financial Reporting for external stakeholders. GAAP Principles aren’t always logical for internal information – matching, periodicity, even accruals. To be efficient in your costing effort you will need to address your financial data source. Either your GL will require significant rework or you will need to use an ERP that allows the creation of a management accounting layer that is more closely connected to operational data and logistics data. Think about it, Invoices and pay rolls come in with operational data together and the accounting systems methodically separates that info until the dollars reach the GL. A management accounting layer would keep operational and financial data connected. 4 4

Resource Consumption Accounting
RCA Inherits Core Principles from German Cost Management (GPK) Well Developed Standard Costing System Practiced since the Late 1940’s Principles used in 3,000+ Companies RCA Integrates Activity-based Costing and Throughput Concepts RCA Creates an Integrated Economic Model of Operations for Decision Making Enterprise Optimization Internal Manager focused Principle Based Superior Marginal Analytics RCA Resource view Advantages Process view GPK ABC Capacity Analysis and Management Process Analysis and Management Capacity-Focused Activity-Focused

Resource Consumption Accounting I: Manager Focused Managerial Costing
Introduction to RCA Management Accounting with a Manager Focus Principles and Concepts for a Manager Focus

What is Enterprise Optimization?
To Maximize Revenue or Mission Outcomes To Minimize Cost or Redeploy Resources Decisions On: Use of Existing Resources and Capabilities Incremental Changes to existing Resources Major Changes to existing Resources

Modeling… the Organization’s Operations & Costs
What is Management Accounting’s Contribution to Enterprise Optimization? Decision Support, Planning and Control Over the Value Creating Operations of the Firm By doing what? Modeling… the Organization’s Operations & Costs

Resources (also creates any revenues!)
What Causes Costs? Resources (also creates any revenues!) Resource Pool Another Pool (s) Or Final Product/Service Organizational Element (Support or Production) Material/Commodity Labor Equipment Operating Budget Material Services (Reflecting Resources Applied) Fixed OUTPUT Proportional The model is really very simple, in theory. Resource Pools – Homogeneity, Output relationships, Consumer The key is to forget about the money for a while, and trace the resource relationships….not necessarily what they do, but who they do it for – Input and output through your organization. Two problems exist: Your organization isn’t this simple. You almost certainly don’t have the information in your general ledger. How do I know this? It doesn’t have dollar signs on it. Resource Quantities Drive Monetary Quantities 9 9

More Realistic Resource Flows
Resource Pool A Final Output 1 Resource Pool E Resource Pool B Final Output 2 Resource Pool F Final Output 3 Resource Pool C This is an illustration of an organization – yes they are normally that complicated – you know it. Resource Pools are groups of people and equipment producing a homogeneous output. A-D would generally be support functions. E-F are generally operational but provide some cross support. Each Arrow is an OUTPUT, an intermediate output, of a Resource Pool with particular characteristics that may not be reflected if only the final output is analyzed. The final outputs are probably missions or readiness hours. Given this level of complexity, how can you determine marginal costs of additional units of output or marginal changes due to changes in intermediate output throughout the process? Resource Pool G Final Output 4 Resource Pool D Resource Pool H 10

What Are the Primary Characteristics of Resources?
Capability Quality or Qualitative Characteristics Capacity Quantity They Provide Consumption/Cost Consumption/Cost Structure Consumption/Cost Behavior

How Do We Define Capacity?
Productive Non-Productive Idle/Excess Questions: Who is Responsible for Idle & Excess Capacity? What can Allocations of Idle & Excess Capacity Do to Costs?

Which Cost Concept Must Form the Basis for Cost Modeling?
Cost Concepts Operational Fixed Variable Decision Support Unavoidable Avoidable Opportunity Cost “Relevant Range” Which Cost Concept Must Form the Basis for Cost Modeling? Can be Modeled Basis for Action Divisibility of Resource Information

What Constitutes an Effective Model of Operations & Costs?
Naturally we came up with a design to show how the principles and their supporting concepts operate. The modeling view involves identifying Resources, operational Quantities, and the costs and applying them using the principle of causality and its supporting concepts. This results in an operational model providing attributable cost. How many are familiar with attributable cost? Short Definition – As close as you can get to full cost applying only cause and effect relationships, no noncausal allocations. The model provides baseline information for decisions to optimize the organization by applying the principle of Analogy and its supporting concepts. Decisions and actions Use the Information…..The are applications of the principle of analogy. IMA Managerial Costing Conceptual Framework Task Force

Resource Consumption Accounting I: Manager Focused Managerial Costing
Introduction to RCA Management Accounting with a Manager Focus Principles and Concepts for a Manager Focus

What Constitutes an Effective Model of Operations & Costs?

Principle: Causality Optimization Thinking:
For a Given Outcome Understand the Cause For A Decision Alternative Understand the Effect Cost must reflect the resource flows or consumption to be logical and useful for decision making and control. The principle of causality is the key to linking management accounting information to operations and operational data. Its application is based on the laws of logic – Rational Inference and Analogy, as they apply to inductive reasoning for decision making and most scientific discovery. Managers and employees engaged in a production or support operation think about and manage resources first, cost is a important constraint, but it is an abstraction. The closer costs are related to resources, the more they will be used logically. Non Causal allocations and assignments of cost rapidly cause cost figures to loose credibility and confidence. Employees and managers engage in economic optimization thinking by first observing an unsatisfactory financial outcome from operations which they want to improve, or a very good outcome they want to replicate. Causality allows that financial outcome to be logically and directly traced back to its operational root cause. Managers and employees then conceptualize solutions or courses of action to resolve the problem or replicate the success. Ideally they will be able to run solution scenarios through the management accounting model and assess which provides the most desirable economic outcome. Cost must reflect operational resource flows from work center to work center within the organization to be useful for decision making at all levels. Cause and effect relationships are the most essential principle for creating a model for economic optimization, and lets be clear the financial accounting and reporting model or GAAP consistently compromises the principle of causality in regard to managers and employees for other objectives associated with external stakeholders.

Causal Relationships Strong Form - Consumption relationship can be quantified Weak Form – Consumption relationship exists, but cannot be quantified Examples: Excess Capacity, CEO & personal staff, Public Relations Attributable Cost – Costs of an output that could be eliminated if that output were discontinued and resources were reduced accordingly. Cause and Effect Relationships have 2 forms: Strong – demonstrated on the previous slide – a clear, quantifiable input-ouput relationship – that may be fixed or proportional. Weak – No clear input – output relationship, but a relationship exists. Examples The most complete costing concept that support causality is Attributable Cost. The logical out come of this is model quantifiable relationships based on resource consumption or input output relationships, where no quantifiable relationship exists apply the resource consumption or cost by the responsibility level where it could be eliminated. Example: Joint distribution cost, Idle capacity (marketing), 19

RCA Structure for Marginal Costing
Quantitative Definition of Material Causal Relationships Support/Secondary Resource Pools Activities Primary Resource Pools Primary Activities Product/Service Objects Result Segments Weak Causal Relationship RCA Structure for Marginal Costing How RCA Accomplishes better marginal costing Highlight – Resource pool to Resource Pool vs. RP to Activity to RP All solid arrows are quantifiable consumption relationships (and their costs) - fixed and proportional Nonquantifiable relationships and excess capacity are assigned by responsibility level - Here ID’d as Common Fixed Costs Causality Attributability – allows derivation of lesser cost concepts that don’t properly reflect the strong and weak forms of causality

Concept: Responsiveness
Insights into the Nature of Cost & Consumption Product A Product B Service 1 Service 2 Service 3 An Output Inputs & their $’s Fixed Inputs Proportional This leads us to the principle of responsiveness. Every set of resources has a individual characteristics….in terms of both its operational resource outputs, but the dollars associated with them. And complex relationships exist within your company. When you think about managing costs, you need to understand these relationships in some detail. The fastest way to explain responsiveness is to look at something you are familiar with

Variability Responsiveness
The principle of variability is widely known. You learned it as CVP or Break even analysis. The problem is variability only looks at a resource’s relationship to a final product or service. So a cost is considered variable if it has a proportional relationship to the final output. That obscures a lot of information. CG Fuel Example. Responsiveness involves tracking fixed and proportional costs much more discretely and gives deeper insights into an organizational costs. It also allows a more logical and thorough assessment of whether costs are avoidable or unavoidable for decision support. Traditional Principle of Variability: Total Cost to Total Volume Responsiveness 22 22

Examples of RCA Multi-Level P&L
What kind of information will you have? Let’s examine the typical financial output of RCA and see how it links to operations. First: The Profit & Loss Report includes levels of the organization. The product level, the product group level, it could include more like product family. Examples of RCA Multi-Level P&L

Next: The cost information is broken into Marginal and Attributable. Marginal costs are driven by production levels – more output will use more of the resource. Attributable costs are necessary for production but they have a fixed relationship – more production uses the same amount of the resource. A second type of attributable resource is costs that are controllable at a specific organizational level. I’ll give an example of that in a moment. Examples of RCA Multi-Level P&L

Along the left side, you have: Product Revenue Throughput Margin Then proportional costs are removed – again these vary with production levels. Contribution Margin Then Fixed costs are removed. Providing a gross product margin. The key is all of these costs are under the control of the product line supervisor based on the level of product he or she is directed to produce. Clear causal relationships. Next we have the costs that are associated with the product group. Costs that cannot be assigned to individual products based on a cause and effect relationship. We see again proportional/marginal costs. A product group contribution margin. Fixed Costs And a Product Group Gross Margin. Let’s take notice of Excess Capacity. This is from the resources in Production line A & B. They all attributed to the product group because that’s the level that is responsible for sales and marketing……and therefore, excess capacity. The production line supervisors job is to be more efficient and increase quality, The product group is responsible for the use of the productive capacity. Examples of RCA Multi-Level P&L

Costing Continuum/Levels of Maturity
Predictive: Demand Planning Driven with Capacity Sensitivity Descriptive: Expense Tracking, Cost Reporting and Consumption Rates Finite systems modeling Attributable costs on all objects, blends activity and direct resource charges, consumes activities back to resources (TDABC); forecast driver quantities X std unit rates; direct cost focus; repetitive work conditions (ABRP); forecast driver quantities X std unit rates, driver-based budgeting Unused capacity costs (estimated) Level 6 with customer & channel profitability reporting; Cost-to-serve Push activity-based costing (ABC), Product costs Individual std costs, project & job costing Add indirect costs Process/ lean accounting Direct cost to outputs Book- keeping 2 Process Visibility 3 Output Visibility 4 Output Visibility 5 Explicit Outputs 6 Explicit Indirect Costs 7 Customer Demand Sensitive 8 Unused Capacity Aware 9 Pull ABC Resource Planning 10 Time- driven ABC 11 R C A 12 Simulation 1 Blind No marginal insights Limited process marginal insights Direct cost marginal insights All output cost marginal insights Output specific marginal insights Explicit output marginal insights Add customer & channel marginal insights Common fixed costs begin to be isolated Increased ability to isolate common fixed costs Increased ability to isolate common fixed costs Explicit resource cost object, supply-based denomina-tor, strong & weak forms of causality catered for No change No Marginal Insight Marginal Insight Awareness Detailed Marginal Insights

Concept: Work Insights into Process Effectiveness
Without the Work Principle: Resource Pool A Product 123 Inputs: Planned Output: 1,000 Hrs Actual Output: 1,100 Hrs Pool A ,100 Hrs Using the Work Principle: Product 123 Resource Pool A Inputs: Setups Planned Output: 1,000 Hrs Actual Output: 1,100 Hrs Setups (Qty 10) 300 Hrs Run Machine Hrs Run Machine

Integrated Data Orientation

For Enterprise Optimization RCA Provides:
Operational View of Organization Fixed and Proportional Nature of Cost Costs are Better Understood, Responsibility for Costs is Clearer Multi-level and Multi-dimensional Contribution Margin / Profitability Reporting Capacity Utilization Information Planning, Forecasting, and Simulation Model is Reversible/Invertible for Calculations

Resource Consumption Accounting: Modeling and Applications
Larry R. White, CMA, CFM, CPA, CGFM Executive Director, Resource Consumption Accounting Institute National Chairman of the IMA Board,

Resource Consumption Accounting II: Modeling and Applications
Overview of RCA Modeling Applications & Results Options for supporting technology

Operational & Financial Alignment
Operational View Financial View Resource/Resource Pools Intermediate Outputs Processes/Value Streams Accountants typically focus on Product or Service cost and our systems focus on providing that with some level of detail. But Cost Management needs to occur much more discretely. Information on processes and value streams, and more deeply Intermediate outputs. The real bottom line for cost management is Resources – only by managing resources – eliminating them or making them more productive can cost be saved. In fact it’s at the Resource level that the financial view and the operational view connect. When you think about excellence in Cost Management information, you need to understand the differences between your Financial view and the Operational view. What are the differences: Operational information – particularly in Manufacturing is real time in MES systems – sensor and alarms typically. FR happens around a well orchestrated cycle. Operational information is action oriented – fix the problem now. FR is report oriented – let’s look back and analyze. Operation information is internally focused – and very detailed about it processes. FR is externally focused – thinking about the capital markets, regulators, and external stakeholders. Products/Services Real Time Action Oriented Internally Focused FR Time Report Oriented Externally Focused

RCA Modeling Traditional Standard Costing Indirect 2 Direct Product
P&L Traits: Been Around For A Long Time Best Understood of Current Methods Works Perfectly in Low Diversity & Low Complexity Environments Low Causal Relationships in Some Allocations Typically A Full Absorption System Allocations are Volume Sensitive No Resource Interrelationships Weak on Cost Behavior & Cost Control

RCA Modeling Direct Indirect 2 Product P&L Activity 1 Activity 2
Standard Costing Activity Based Costing Direct Indirect 2 Indirect 1 Product P&L Traits: Higher Causal Relationships in Allocations & ABM Resource Interrelationships at Activity Level Full Absorption System - Volume Sensitive Limited Capacity Management No Marginal/Incremental Information Weak on Cost Behavior & Control

RCA Modeling RCA Activity 1 Product P&L Indirect 1 Indirect 2 Direct
Standard Costing Direct Indirect 2 Indirect 1 Product P&L Activity 1 Activity 2 ABC Product P&L Activity 1 Indirect 1 Indirect 2 Direct Non-causal Costs Direct Indirect 2 Indirect 1 Product P&L Traits: Causal Relationships Interrelationships at Resource Level Not Fully Absorbed Handles Volume Fluctuations Strong on Capacity Management Manage Model Complexity Strong on Cost Behavior & Control

RCA Storyboard 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.

RCA Storyboard Manufacturing Costs Product Support Cost
S: Ancillary Production Equipment S: Administration Human Resources & Accounting S: Quality Assurance RP: Dryer (Hours) Capacity: 100 Output Qty: 100 S: Plant Engineering and Maintenance RP: Plant Maintenance (Maint. Labor) Capacity: 30,000 Output Qty: 30,000 P: Extrusion Line RP: Extrusion Labor (Labor hours) Capacity; 32,000 Plant P&L Department Resource Pool Abbreviated RP Activity RP: Chiller Capacity: 50,000 Output Qty: 50,000 Perform Accting Admin QA Testing Legend S-Support P- Production Noncausal Costs Product Returns RP: Extrusion Machine1 (Machine hours) Capacity; 17,520 Output Qty: 10,000 Manufacturing Costs Product P&L RP: QA Labor Capacity: 14,000 Output Qty: 14,000 RP: Admin Labor Capacity: 17,000 Output Qty: 17,000 HR

RCA Information

The RCA Modeling Approach
Model the resources, their capacity, and where they are consumed Model the quantities of resources consumed, and the nature of that consumption Nature = Fixed or Proportional Model the costs that flow with the quantities and the nature of the consumption Resources are the fundamental linking point between operations and finance. If you think about it, Every organizational decision is a resource consumption decision….from expanding a plant to hiring or firing an individual….every thing in the organization is a resource, every process uses resources. The RCA Model has 3 fundamental steps: Identify resources, their capacities, and how they interact to create value. Quantify the flow of resource quantities, and the nature of the consumption throughout the organization using operational quantities, not dollars. Finally, apply costs, or monetary rates, to the consumption of quantities. Let’s look at a simple example. 40 CMA Learning System Version 3.0. Part 2: Financial Statement Analysis © 2009 Institute of Management Accountants. All rights reserved.

Step 1: Model Resources, Capacities, and Consumption Path
Direct Materials Capacity Unlimited Finished Product Plant Labor Capacity 240 Hrs Plant Maintenance Capacity 240 Hrs Idle Plant & Maintenance Labor Step One: Identify resources, their capacities, One on-slide Click. and how they interact to create value. Training Corporate Headquarters HQ Reporting 41 CMA Learning System Version 3.0. Part 2: Financial Statement Analysis © 2009 Institute of Management Accountants. All rights reserved.

Step 2: Model Consumption Rates and Nature
Proportional Fixed Direct Materials Capacity Unlimited Finished Product 1 lbs. per unit Plant Labor Capacity 240 Hrs 4 hrs. per unit 30 hrs. per month Plant Maintenance Capacity 240 Hrs 2 hrs. per unit 80 hrs. per month Idle Plant & Maintenance Labor Calculated based on production Second, Quantify the flow of resource quantities, and the nature of the consumption, fixed or proportional, throughout the organization in operational quantities. Note we don’t have any money in the model yet. No On-slide Clicks Training 80 hrs. per month Corporate Headquarters HQ Reporting 80 hrs. per Month 42

Step 3 Add Costs and Flow with Resource Quantities
Proportional Fixed Direct Materials Capacity Unlimited $10 per unit Finished Product 1 lbs. per unit Plant Labor Capacity 240 Hrs $200 $0.83 per hr 4 hrs. per unit Materials xx 30 hrs. per month Proportional Cost xx Plant Maintenance Capacity 240 Hrs $300 $1.25 per hr 2 hrs. per unit Fixed Cost xx 80 hrs. per month Idle Plant & Maintenance Labor Calculated based on production Finally, apply costs to the consumption of the resources and the flow of Operational quantities. One On-slide Click And you get financial results tied to operations in a cause and effect manner. Idle Labor xx Training 80 hrs. per month Fixed-Training xx Corporate Headquarters HQ Reporting 80 hrs. per Month Fixed–HQ Reporting xx 43

MANAGERIAL ACCOUNTING – MULTI-LEVEL P&L
Product P&L Proportional Cost Fixed Cost Revenue xx Materials xx Direct Materials Capacity Unlimited $10 per unit 1 lbs. per unit Proportional Cost xx Fixed Cost xx Plant Labor Capacity 240 Hrs $200 $0.83 per unit 4 hrs. per unit 30 hrs. per month Product Margin xx Plant Maintenance Capacity 240 Hrs $300 $1.25 per unit 2 hrs. per unit Plant P&L 80 hrs. per month Idle Labor xx Calculated based on production Fixed - Training xx The result is a multi-level P&L that accurately reflects marginal costs based on resource consumption and properly assigns excess capacity to a level where it is most appropriately managed No On-slide Clicks. Plant Margin xx 80 hrs. per month Corporate P&L Corporate Headquarters Fixed HQ Reporting xx 80 hrs. per Month Corporate Margin xx 44 44

Plastic Film Extrusion
Pre-RCA Issues Product costs fluctuated based on unrelated changes in volume and mix Products manufactured on newer machines receive greater cost allocations even if the products were identical Old machines were fully utilized and new machines underutilized Sales reps lowered selling prices (non-strategically) to increase volume in an effort to decrease allocated cost per unit and thus ‘improve’ their margin RCA Results Product cost is stable even if machine is replaced by a new one Allocated fixed cost changes due to volume and mix resolved Machine utilization issues resolved by cost depreciation Margin manipulation eliminated; in fact, it was shown that Standard Costing overstates fixed costs.

Semi-conductor Business
Product Pricing Life cycle product pricing vs. short-term product pricing Because equipment is old (fully depreciated) RCA provided a window on the long-term profitability of product decisions Cost Attribution Proper attribution of common fixed costs to market segments e.g., machine excess/idle capacity to a product group The gross margin of the product group reduced by 63% Batch Sizes Understand the effect of smaller batch sizes on profitability Normal batch = 24; most often manufactured small batch product had a 22% drop in gross margin at batch = 12 Product Mix Understand factory bottlenecks for different volume and mix Know how the bottleneck moves for a given volume and mix Simulations pointed to two potential bottlenecks

Automotive OEM Business Scenario RCA Cost Model
A green-field automotive original equipment manufacturer (OEM) Acquired their way into the automotive business by buying the rights to make and re-badge a model from another OEM Large SAP implementation The need to integrate highly automated support areas (e.g., automated storage and retrieval warehouse) into the costing model RCA Cost Model Significant royalty costing at various levels in the BOM The ability to run the cost model from resources through to products and sales (i.e., typical costing) or to run the model backwards from projected sales volumes to resource demand Effective capacity management a primary objective also for support areas

Cormatech – MESA Metrics Challenge
Real time dashboard of key KPI’s allows for quicker reaction to out of range operations performance Focus is on KPI’s that are financial drivers Can drill down to financial detail Retail time target spending, must continue to work to get timely actual financial data Can simulate financial impact of changes to operations KPI’s

Sample Data / Illustration Only
Deliver innovative products and services that improve air quality and maximize stakeholder value Multiple users have different needs for looking at the data - Ease of use is the key to adoption of this application. Home Financial Perspective This Balanced Scorecard summarizes Key Performance Indicators from several critical systems of Cormetech. Select a Perspective to drill through the detailed analysis. Customer Perspective Many different users will have access therefore Ease of use Is the Key to adoption of this application. This mockup is designed around the traditional 4 main areas of a Balanced Scorecard: Financial Perspective Customer Perspective Internal Processes Learning & Growth For the moment, we’ll focus on the Financial Perspective and Internal Processes where the orange triangles indicate that actual numbers are out of the planned values. Before we click on « Financial Perspective », just keep in mind that the numbers shown here are sample data only, used to demonstrate a scenario more than to represent the actual operations of Cormetech. Internal Processes Learning & Growth

Financial Perspective
Sample Data / Illustration Only Home Financial Perspective Customer Perspective Internal Processes Learning & Growth All Facilities Facility 1 Facility 2 Total Costs Analysis Financial Perspective Quick and clear understanding of trends, drives correct problem recognition June 2011 Graph show total operational costs Output Table is in operational units: hours, m3, etc. Quick and clear understanding drives the correct Business decisions. The line in red and performance indicated by the graph drives the reader to clearly see that facility 1 needs attention NOW the question is why? Out of the 2 facilities, Easy to see « Facility 1 » needs attention. Out of the table view, notice how the « Forming » cost center’s plan costs is exceeding the Target. It is important to understand that comparing Actuals with Plan is not enough. If you take a closer look at the « Operators » and « Prod Support » cost centers, you’ll notice that the actual costs are lower than the plan, but the output is also lower than expected. Therefore, on a unit basis, these cost centers are not performing well. Let’s come back to « Forming » and click on it for drill-down. Drill-Down

Sample Data / Illustration Only Home Financial Perspective Customer Perspective Internal Processes Learning & Growth All Facilities Facility 1 Facility 2 Total Costs Analysis Financial Perspective Drill-downs enable quick detailed analysis with icons: the forming line and extruder need further analysis June 2011 A closer look at the details, reveal Drill-downs enable quick detailed analysis with icons: the forming line is the main cause of the issue It is impacted by the lower performance of the « Extruder ». Let’s click on it for more details. Details

Sample Data / Illustration Only Home Financial Perspective Customer Perspective Internal Processes Learning & Growth All Facilities Facility 1 Facility 2 Cost Center Analysis / Extruder In this case actual maintenance costs are higher than target, so this is where investigation would start. (Variance is based on a percentage range over target) Financial Perspective At a Glance – the Problem is easy to see – actual costs are higher than planned The solution - the exception of the « Maintenance » costs. This is an incident worth investigating. In this Cost Center Analysis view, we can see in the graph that the « Actuals Values » (in red) are now higher than planned (in blue). Also, taking into account the seasonality from the previous year (in green), we could expect the situation to become worse in the upcoming month unless some actions are taken. In the bottom part, we can see how the total output was more than expected (118 > 96). As a logical consequence, all of the actual costs are higher than planned, but since we’re ahead of production, the comparison with targets indicates that everything is still fine, with the exception of the « Maintenance » costs. This is an incident worth investigating.

Customer Perspective Customer Perspective
Sample Data / Illustration Only Home Financial Perspective Customer Perspective Internal Processes Learning & Growth All Facilities Facility 1 Facility 2 Customer Profitability Analysis by Project Customer Perspective Customer Perspective Combining revenue and costs allows decisions based on profitability. Can also drill down to a customer by customer basis. Compare Plan to Cost for: Project: Lab, Eng. Services, Manufacturing, and Shipping. Product profitability comparisons Combining Revenue and Costs allows decisions on a customer by customer basis. This function has not yet been implemented but we wanted to show you the future and where this could go. imagine a report showing all open projects by customer, as well as their related revenue, costs and profits.

Sample Data / Illustration Only Product Composition / Product A
Home Financial Perspective Customer Perspective Internal Processes Learning & Growth 70 % Product Composition Production Product Composition / Product A Internal Processes Excel Add-in can be used Aggregated and drill down by product The single shared model gives common understanding for all users (product managers, engineers, etc.) Quantities and Costs can be displayed in a simple interface. A first look at the composition of Product A shows little variance from the planned costs. The manager clicks on the production tab, where the red diamond indicates unexpected results. The single shared model gives common understanding of product line performance for all users (product managers, engineers, etc.)

Sample Data / Illustration Only Production Efficiency / Product A
Home Financial Perspective Customer Perspective Internal Processes Learning & Growth Product Composition Production Production Efficiency / Product A Internal Processes Simulation: Same as KPI’s See where Continuous Improvement offers most benefit Adjust focus weekly to meet month end goals Compare operator actions to actual cost Shift focus from production rate to MU or vice-a-versa 1/3rd of the production is lost to inefficiencies Managers can simulate (+- icons) the impact of future decisions Here, the manager realizes that the efficiency of the extruder is unexpectedly low. 1/3rd of the production is lost, mainly due to inefficient « Idle » and « Utilization ». He opens the « Drill-Through » for more details. Managers can simulate the impact of future decisions using (+/- icons). Very helpful in forecasting.

Sample Data / Illustration Only Production Efficiency / Product A
Home Financial Perspective Customer Perspective Internal Processes Learning & Growth Product Composition Production Production Efficiency / Product A Internal Processes Drill-through shows daily trends with more detail - several days with different production output. Again ,can simulate changes using +/- icons Drill-through shows several days without production. Now Contact the floor manager for the root cause analysis. Leading to a continuous improvement project or kaizen event. Here, he can see that several days are showing no production or lost quantities due to « Idle » or low « Utilization ». Using these data, he contacts the floor plan manager who explains the root of the problem: a failure in a key element inside the machine had stopped production for a while. They both simulate and agree on a new target for « Idle », « Utilization » and « Select ».

Technology Options Large ERP Best of Breed
Involved in Research and Development of RCA Best of Breed Management Accounting Suite of Products Intended to Bolt onto Medium and Large ERPs Business Intelligence (BI/BW) An Open-source Business Intelligence Application that Runs on Excel

RCA Institute Objectives
Improve Management Accounting Knowledge and Practice Focus on Decision Support for Enterprise Optimization Build A Highly Structured and Disciplined RCA Community Create Standard Body of Knowledge and Standards of Practice Initial Objective is Highly Skilled Practitioners (The Tipping Point) Provide A Professional Structure that Minimizes Risk to RCA Adopters

RCA Support & Quality Assurance
Institute Membership Corporate & Individual Certification Specialist, Practitioner, Master Software Products Adopter Exploratory Workshops Customized Workshops applying RCA to an organization Implementation Review/Assurance Support Adopting Organizations & Practitioner Expertise Adopter Internal Use Reviews Evaluations of An Organization’s Effectiveness Using and Maintaining RCA RCA Institute Service line Interested – Place to start

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

Resource Consumption Accounting: Manager Focused Management Accounting

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