What is RCA?
What are its roots?
It is primarily based on German Grenzplankostenrechnung (GPK), which has been integrated with some U.S. activity-based costing (ABC) practices and traditional U.S. management accounting concepts (e.g., Prof. Gordon Shillinglaw’s attributable cost concept). German controlling, or management accounting methods focus primarily on internal decision support information and are generally not part of financial reporting. RCA focuses on internal decision support information.
How does it compare with other management accounting approaches?
Resource Consumption Accounting (RCA) is a principle-based approach to management accounting that elevates management decision making for the purposes of achieving enterprise optimization. It rigorously applies the responsivenessInstitute of Management Accountant's Conceptual Framework for Managerial Costing to provide insight into the operations of the organization for effective economic decisions. Other management accounting approaches focus on methods to parse General Ledger information and make complex, confusing, and frequently erroneous compromises in fundamental decision support modeling principles vital to effective management decision information. RCA offers a combination of both, proven and innovative new concepts.
What are its core elements?
- The view of resources – resources and their costs are considered foundational to proper cost modeling and decision support. An organization’s cost and revenues are all a function of the resources that produce them.
- Quantity-based modeling – the entire model is constructed using operational quantities. Operational data is the foundation of value creation and the leading indicator of economic outcomes.
- Cost behavior– value is added as a veneer to the quantity-based model and costs/dollars behavior is determined by the behavior of resource quantities as they are applied to value creating operations within an organization.
- RCA creates a non-financial operational model of the organization first, and then creates cost information to reflect the operational model
How does it address current shortcomings in management accounting?
- RCA applies the Institute of Management Accountant's Conceptual Framework for Managerial Costing as comprehensively as required to support an organization's strategic goals and most frequent decisions.
- Clearly defined, unambiguous, rules for the application of its principles, of which causality is the primary principle.
- 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.).
- Operational modeling and modeling consumption behavior follows the principle of responsiveness and not the traditional principle of variability. Responsiveness allows for deep insights into resource and cost behavior and vastly improves information available for a wide range of optimization decisions that normally require a special study to evaluate.
What is the real value RCA adds to decisions and decision making?
- Decision support information based on the inductive principles that govern managers’ decision making processes. RCA connects monetary outcomes to operational decision (and vice versa) in a clear, logical, and undistorted manner.
- Cost and profitability information is accurately and effectively compiled based on an organization’s optimization needs. The need for special studies and their inherent variability in analytical quality is eliminated.
- An economic model of the enterprise allowing simulation of changes in both quantities and costs to explore the impact of alternatives on the bottom line. An RCA model, because of its application of the principles of causality and responsiveness is highly invertible – it will function effectively for both producing actual operational results and planning for desired outcomes.
What are some examples of ‘RCA as a basis for better decisions support information’?
- Attributable cost as the primary objective in RCA cost modeling ensures that managers are not confronted with monetary decision support information compromised by arbitrary allocations. (Attributable cost was defined by Professor Gordon Shillinglaw as the closest calculation to full cost that maintains the principle of causality. This concept is critical to eliminating the distortions and complexity associated with cost allocations needed to achieve full cost at discrete levels in an organization – for example: a product or even product line level.)
- The concept of responsiveness provides unfettered insight into consumption and cost behavior at the level of the good or service that is the subject of a decision. (Traditional cost accounting uses the concept of variability and looks at the behavior of total cost associated with a final output. In RCA greater divisibility and consequently superior analysis is provided by consistently applying the principle of responsiveness to costs at the resource pool level.)
- A clear delineation between operational cost concepts (fixed and proportional) and decision support cost concepts (avoidable and unavoidable) strives to eliminate the blended cost concept error in decision analysis. (The blended cost error occurs when variable costs are considered synonymous with avoidable and fixed costs synonymous with unavoidable.)
What does it take to implement RCA?
- Knowledge: The principles of RCA are those of solid management accounting; however, they are not effectively taught in today’s financial accounting focused university curricula’s. To effectively apply RCA, an organization must make an investment in new intellectual capital. The RCA Institute online library provides the basic material; however, the most efficient way to obtain the necessary knowledge and skills is through RCA Institute training courses.
- Organizational change. Changing an organization’s decision support information and processes is a major undertaking; however, RCA’s focus on operational data will vastly improve the relationship and teamwork across the organization – particularly between Finance and Operations. Positive tangible and interpersonal results will accrue from a deeper understanding of the structure of the resources needed to create value across your organization – from both support and operational resources.
- Information Technology: Select and implement RCA capable software. No software is specifically designed for RCA; however, a number of options are available based on an organization’s IT infrastructure. RCA is in a unique position with regard to enabling technology e.g., current SAP users have no incremental investment in IT to adopt the approach.
Is there an implementation methodology?
Yes there is. Please contact the RCA Institute for a list of RCA certified providers that have been trained in the RCA methodology.
What are the risks?
- Lack of management buy-in: Implementing RCA is a substantial project that requires commitment across the organization in particular by management to educate a project team, design the model, implement it in existing or new software, and educate the organization to use the information to improve managerial processes and decision-making.
- Unwarranted adoption : RCA is not for everyone; companies should refrain from jumping for a new approach merely because it is new.
- Politics: In organizations where political gaming is pervasive, an RCA implementation can lead to vulnerability for some stakeholders due to better information and increased transparency.
How are these risks mitigated?
- Lack of management buy-in: Education on the approach and the correct ways of looking at and using RCA information as part of a tailored change management initiative is key. This will ensure the organization’s senior management is clear on the value of RCA and prepared to support the necessary investment in the project and subsequent changes in information and decision making.
- Unwarranted adoption : The RCA Institute therefore offers various ways to validate and evaluate whether RCA is appropriate for potential adopters. See the Testing the Waters section on this website.
- Politics: Integrating RCA information into organizational performance management.
Has it been implemented?
RCA has been selectively implemented during its incubation phase. Refer to the case studies on this website for more information.
What were the learnings from these implementations?
- Confirmation of five decades of GPK research that confirms the validity of the principles and concepts that RCA is based on.
- The identification of the risks when adopting RCA (see above) and the steps that can be taken to mitigate these.
- RCA as a comprehensive management accounting approach that combines the best of traditional management accounting and the new thinkers from the 1980’s, on both sides of the Atlantic, into an innovative and highly effective decision support system.
- The validation of the RCA implementation methodology.
If I Become a Certified RCA Designer or Implementer:
What will I gain?
- The knowledge and skills to market and implement a new and revolutionary approach in management accounting.
- Highly marketable and unique insights into modeling business operations and their supporting resources to provide cost saving and value creating information.
- Practical methodologies to correctly apply foundational management accounting principles to systematically improve management decisions and optimize an enterprise.
How does that help me?
- Acquire the ability to implement a management accounting approach that provides your organization or clients with superior enterprise optimization capabilities.
- Broaden your skill set and capabilities in management accounting and decision making and be among the first to understand an approach that promises to become the primary method of providing managers with their decision support information.