Resource consumption accounting applied: the Clopay case: in the October 2004 issue of Strategic Finance, we introduced a case study of Resource Consumption Accounting (RCA) conducted by the RCA interest Group of the Consortium for Advanced Manufacturing-International (CAM-I) at Clopay Plastic Products Company. Here we provide a more detailed description of the case.

Resource consumption accounting (RCA) is an emerging management accounting method that blends the advantages of German managerial accounting's emphasis on resources with those of the activity/process view provided by activity-based costing (ABC)--all couched in an enterprise-wide decision-support system. This system goes far beyond "cost accounting" to provide superior underlying information (broader availability and greater accuracy), which is fully integrated throughout the organization across the various reporting and planning systems. RCA takes advantage of an enterprise resource planning (ERP) system's ability to track, maintain, and group the most detailed information and to effectively integrate operational/logistical and monetary information. This detail will support the most precise analyses at the lowest levels (e.g., for a machine or its operators), yet it easily can be aggregated to provide summary-level strategic data or data grouping at virtually any other level.

The main purpose of the Clopay Plastic Products Company case study was to examine the changes in cost assignment and the ensuing benefits of implementing relevant RCA principles in one factory of a larger manufacturing company. Resource consumption rates developed during the case study used German-based Grenzplankostenrechnung (GPK) cost-assignment logic, an integral component of RCA. Additional RCA principles include selective use of ABC in cost-assignment methods, replacement cost depreciation, and theoretical capacity as the denominator in standard rate calculations. (1) Key points from the October 2004 Strategic Finance article (shown in the sidebar titled "Pre-RCA Issues and Post-RCA Features, Results, and Demonstrated Benefits") include important pre-RCA issues and post-RCA features, results, and demonstrated benefits for which we provide expanded discussion here.

CLOPAY AND THE PRE-RCA SYSTEM

Headquartered in Cincinnati, Ohio, and with filmmaking operations in Kentucky, Tennessee, Germany, and Brazil, Clopay Plastics is a leading manufacturer of specialty films, extrusion coatings, and laminations. Clopay's products serve hygienic, healthcare, protective apparel, and industrial markets. The case study was conducted at the Augusta, Ky., plant, which produces approximately 200 products in 60 product families serving primarily the healthcare and hygiene markets. Approximately 70% of the product families are in the healthcare market, and 30% are in the hygiene market. The Augusta plant's production process is illustrated in Figure 1. Production departments include five extrusion departments that house 10 extrusion lines and one converting department that houses two sheet-cutting lines, one perforator, and one rewinder. Five departments--shipping, materials management, quality, maintenance, and administration--support the manufacturing process.

[FIGURE 1 OMITTED]

The pre-RCA Clopay standard costing system (CSC), illustrated in Figure 2, is a relatively traditional standard costing system. Raw-material standard costs are established and assigned directly to products. Support department costs, including indirect labor, support labor, office supplies, and other depreciation, are allocated to production departments. Quality and maintenance are allocated based on machine hours, shipping is allocated based on production pounds, and plant material management is allocated based on purchased pounds. Administration, human resources, and accounting are allocated based on head count. All allocations are made using the direct allocation method (i.e., directly to production departments to be included in each department's cost allocated to products). No reciprocal relationships between support departments are recognized. At the production department level, direct labor, supplies and utilities, machine depreciation, and allocated overhead are assigned to products through the departmental machine rates using machine hours as the cost driver.

[FIGURE 2 OMITTED]

THE RCA IMPLEMENTATION PROCESS

The Clopay RCA implementation process started with the construction of a storyboard or flowchart that maps the interrelationships among production and support departments, product costs, and common fixed costs. During this process, RCA principles are used to determine costs attributable to specific resource pools. To construct an RCA model properly, managers must understand all resource interrelationships. Resource-pool construction focuses on grouping the costs of homogenous resources in a specific area of responsibility. German cost management systems commonly refer to such an area of responsibility as a cost center, which could comprise one or more resource pools. For example, a resource pool may comprise a particular machine and the workers that operate the machine.

In some cases, it may be necessary to use judgment in defining each resource's inherent/innate cost nature within a particular cost pool. Using the example just mentioned, a cost pool that includes a machine would need to determine the innate nature of the costs in the resource pool (e.g., depreciation, maintenance, and electricity) as related to the resource pool's output. These costs may be innately fixed, proportional, or a portion of both. Often these costs are apportioned in a manner that is much more specific than in most U.S. management accounting systems. For example, where direct labor routinely is considered a variable/proportional cost, (2) RCA would recognize the time that workers spend in training classes to be an innately fixed cost in relation to resource pool output. The plan for the worker is that he/she will not provide output during the time he/she is in training sessions. This portion of labor would represent nonproductive capacity that would be a planned fixed cost to the company. Thus, a portion of the direct labor cost would be treated as innately fixed and a portion as innately proportional.

Once resource pools are constructed, the cost objects that consume the resources' outputs from each pool are identified, and the relationships are diagrammed. Causality is the key to determining the relationships between the resources and their consuming cost objects. As with defining the innate nature of the resource's costs, observation and judgment may be necessary in some cases to find out how a resource is consumed (i.e., its fixed versus proportional cost-consumption pattern in a particular resource-to-output context). A sample departmental RCA cost sheet for an extrusion-line resource pool is shown in Table 1 as an example that might result from this process.

RCA COST SHEET

Several features unique to GPK and RCA are illustrated in Table 1:

* Primary and secondary costs,

* Type of cost driver (resource or process),

* Origin of the cost (provider), and

* Fixed and proportional quantities and costs.

The table is divided into separate sections for primary costs and secondary costs. Primary costs are those that originate in a particular resource pool, and secondary costs originate in support or other manufacturing resource pools but are clearly attributable to the consuming object. (3) In the Table 1 example, secondary costs attributable to the extrusion line include maintenance, space, utilities, and ancillary equipment.

The type of cost driver consumed is based on the nature of its output. For example, the cost driver for the secondary cost of office space is a resource type because the output of the resource is office square feet, while the cost driver for the secondary cost of human resources is a process type as the output of the resource is an activity.

The origin or provider of the input (as it is …