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RCAat Clopay
Heres innovation in
management accounting with
Resource
Consumption
Accounting.
B Y B . D O U G L A S C L I N T O N , C PA ,
S A L LY A . W E B B E R , C PA
AND
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Table 1:
RCA
TRADITIONAL
products.
products.
nature of costs.
Recognizes that innately proportional costs can be consumed in a
resource level.
organization level.
Facilitates operations management with quantified actual
quantities.
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RCA Principles
RCA is resource centric, looks closely at quantity of
the resources consumed, and takes into account
that the nature of costs will change. Heres a snapshot look at the basic principles of RCA.
The focus on resource principles:
Recognizes multiple and reciprocal
relationships.
Attempts to include all attributable costs in cost
assignment.
Provides a framework for capacity
management.
The quantity structure principle:
Bases the cost flows from the sender to receiver
on quantity relationships.
Decouples cost value from relationships defining
resource consumption.
The RCA principle of recognizing the innate and
potentially changing nature of costs focuses on two
aspects:
Determining the innate nature of an items cost
at acquisition based on managements decision
or plan regarding how the resource will be
consumed.
Changing costs that are initially proportional by
nature from proportional to fixed based on consumption patterns.
ny didnt consider some overhead costs such as information technology and corporate-level cost because of the
timeline and workload constraints. Clopay also didnt
include changes that RCA would have made given batchrelated informationsetup costs related to the machines,
for instance. Wed expect more significant changes given a
full RCA application where batch costs undergo a more
sophisticated materiality test. In addition, the Augusta
Clopay operation wasnt characterized by significant reciprocal relationships since only about 6% of total cost
resides in support departments. Therefore, the misallocation of support department costs for the Augusta plant
wasnt expected to significantly impact cost accuracy.
Reciprocal relationships among resource pools would
likely have resulted in greater changes in the cost results
for plants where such relationships are significant.
THE RESULTS
Clopay used RCA to create 23 resource pools for costs in
two categories: general support and production departments. Using 23 resource pools as opposed to eight support and six production departments offered the
opportunity to better trace costs by type into resource
pools. More resource pools provided more detailed information, which made for more accurate data to use when
Figure 1:
8 RESOURCE
POOLS
PRODUCT SUPPORT
COMMON
FIXED COSTS
3 RESOURCE POOLS
8 PROCESSES/ACTIVITIES
PRODUCTION
15 RESOURCE POOLS
ACTIVITIES
PRODUCTS
PRODUCT
P&Ls
HEALTH
HYGIENE
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Table 2:
14%
40%
18%
49%
Gross Margin
29%
218%
4%
33%
Contribution Margin
CAUSALITY IS KEY
The most dramatic effect in the RCA application at Clopay was the proper recognition of causal relationships
regarding support department costs and their proper
assignment based on resources consumed. Causality is
the key principle to proper cost assignment relationships,
and RCA requires it.
One relationship mentioned earlier involved rubber
rollers where machines that didnt even use the rollers were
being charged for them. RCA changed that. Since the cost
of rubber rollers was fully attributable to the machines
used in extrusion, RCA assigned the cost correctly to only
the extrusion cost pools. After all, the extrusion line used
the rubber rollers while the conversion line didnt.
Clopay also experienced a major shift from treating certain
costs as fixed when they were innately proportional costs.
Innate means the initial inherent nature of costs. For example, the Quality Assurance department cost was treated
entirely as fixed under the preexisting Clopay product costing
method. But the activities of the department, such as testing
and product returns, consumed resources in a proportional
manner. Because all Quality Assurance costs were treated
incorrectly as fixed costs and allocated directly to production
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MORE TO COME
The case study at Clopay illustrates the importance of
and need for reliable management accounting system
information. With RCA cost assignment, Clopay
increased the fundamental reliability of management
accounting information the system provides. In addition,
the use of replacement cost depreciation and theoretical
capacity mitigates the risk of changes in cost assignment
due to unrelated changes elsewhere.
Weve only begun to skim the surface of this topic, but
if youd like to read a detailed analysis of the Clopay case,
turn to the Fall 2004 issue of Management Accounting
Quarterly, which will be available online at
www.imanet.org at the end of November.
B. Douglas Clinton, CPA, Ph.D., and Sally A. Webber, CPA,
Ph.D., are associate professors in the Department of
Accountancy at Northern Illinois University in DeKalb, Ill.
You can reach Doug at (815) 753-6804 or clinton@niu.edu