ZMCM-18-05-38-El-Helbawy-RCA_ZMCM Article-R 4/26/18 2:40 PM Page 38

IMPROVING COST
PLANNING WITH
RESOURCE RCA s uppor ts cos t planning with infor mation on the res ource view and quantity s tr ucture
of res ources , s hifting the focus from following cos ts to following res ource quantities .

CONSUMPTION
ACCOUNTING
S A I D M . E L- H E L B A W Y A N D M O S TA FA A . A L- Q A DY
........................................................................................................

F
irms should plan product costs before manufacturing, even at the prod-
before manufacturing, even at uct development and design stages.
the product development and RCA supports cost planning with more
design stages. The cost-plan- accurate cost information based on the
ning framework should provide resource v iew and quantit y structure of
infor mat ion on costs associated w ith resources, shifting the focus from fol-
resources and alternative product designs, lowing costs to following resource quan-
based on the resource view and quantity tities. This quantitative model emphasizes
structure of resources. In this article, we resources as the origin of capacit y that
discuss integrating resource consumption should be managed to effectively plan
accounting (RCA) within the cost-plan- and manage costs.
ning framework to improve cost planning
through improving information provided
by the cost-planning framework. Cost planning
A competitive product must meet cus- Cost planning forms a part of the total firm’s
tomer preferences in terms of price, fea- basic planning process, which conceives
tures, quality, and other subjective factors. and delivers the final product to the mar-
A firm should focus all its efforts on pro- ket. Cost planning is not solely target cost-
ducing what satisfies customer specifica- ing, but rather a comprehensive process
tions, otherwise it will be out of the market. at pro duc t desig n and manufac tur ing
Hence, the firm should plan product costs stages that aims at effectively planning

S A I D M . E L - H E L BAW Y, P h . D. , i s a p ro f e s s o r o f c o s t a c c o u nt i n g at t h e Fa c u l t y o f C o m m e rc e , Ta nt a Un i v e r s i t y, Eg y p t .
Hi s n e a r l y 4 0 y e a r s o f e x p e r i e n c e i n c l u d e re s e a rc h a n d t e a c h i n g i n t e re s t s i n A B C s y s t e m s , RC A , l e a n a c c o u n t i n g ,
a n d i n t e ro r g a n i z a t i o n a l c o s t m a n a g e m e n t . Hi s re s e a rc h i n t e re s t s a l s o i n c l u d e h o w t o u s e t h e q u a n t i t a t i v e m e t h o d s
a n d m o d e l i n g t e c h n i q u e s i n c o s t a n d m a n a g e m e n t a c c o u n t i n g re s e a rc h .

M O S TA FA A . A L - QA DY, M S c , i s a n a s s i s t a n t l e c t u re r o f a c c o u n t i n g a t t h e Fa c u l t y o f C o m m e rc e , Ta n t a Un i v e r s i t y,
E g y p t . He o b t a i n e d h i s M S c i n c o s t a c c o u n t i n g i n 2 0 1 3 f ro m t h e Fa c u l t y o f C o m m e rc e , Ta n t a Un i v e r s i t y. Hi s i n t e r -
e s t s i n c l u d e A B C s y s t e m s , RC A , a n d l e a n a c c o u n t i n g . He p u b l i s h e d a p a p e r i n 2 0 1 6 o n t h e i n t e g r a t i o n o f t a r g e t
c o s t i n g a n d RC A . Hi s c u r re n t re s e a rc h i n c l u d e s t h e u s e o f i n s t i t u t i o n a l t h e o r y i n t h e d i f f u s i o n o f l e a n a c c o u n t i n g
i n l e a n e n t e r p r i s e s . He c a n b e re a c h e d a t m o s t a f a . a l q a d y @ c o m m e r c e . t a n t a . e d u . e g .

38 COST MANAGEMENT MAY/JUNE 2018

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product costs through the control of design
specification and the usage of resources.
Managers should not only focus on
manufacturing costs, but should also con-
sider the upstream and downstream costs
throug hout the pro duc t’s life c ycle to
develop a comprehensive analysis of prod-
uct cost and profitability. To accomplish
this, target costing and life cycle costing
are used in planning product costs in the
design stage, while kaizen costing and the
theor y of constraints (TOC) are used in
the manufacturing stage to reduce man-
ufacturing costs and speed up deliver y
downstream.
In addressing the issues of cost plan-
ning , er rors can occur when blending
the concepts of budgeting and cost plan-
ning. Budgeting refers to the procedures
used to develop a budget that specifies
how a firm will acquire and use resources
over a given period. Cost planning, in con-
trast, focuses on how resources should
be used to minimize product costs while
creating value for customers, given spe-
cific levels of functionalit y and qualit y.
In other words, budget ing fo cuses on
s p e n d i n g on re s ou rce s — e s t i m at i n g
what w ill be spent on the acquisition of
resources required to produce and dis-
tribute a product — while cost planning
focuses on resource usage and not spend-
ing — how to use resources in a way that
minimizes product cost.
Life cycle costing
When a firm focuses too much on the man-
ufacturing stage, it may be too late to
tr y to manage a large component of the
product’s total life cycle cost. Costs begin
to accumulate at earlier stages, such as
design and development, and continue
to accumulate after manufacturing. Life
cycle costing tracks the costs attribut-
able to each product from conception
to abandonment.
The understanding of life cycle costs and
profits requires producers to think con-
tinuously about product life cycle from the
production and marketing viewpoints —
cost life cycle and sales life cycle, respec-
tively. Cost life cycle defines the stages of
product life cycle by changes in the type
of internal activities performed to develop,
RESOURCE CONSUMPTION ACCOUNTING
.................................................................................................................................................................................
produce, market, and ser vice products.
It recognizes that most of the costs asso-
ciated with a product are committed dur-
ing the design stage based on the product’s
set functionality. Sales life cycle, on the
other hand, describes the general sales
pattern of a product as it passes through
BUDGETING
sales life c ycle stages: introduct ion to FOCUSES ON
market, sales growth, maturity, and decline SPENDING ON
and withdrawal from the market. A prod- RESOURCES —
uct’s sales life cycle begins when the first ESTIMATING WHAT
unit of product is sold, thus sales life cycle WILL BE SPENT ON
THE ACQUISITION
is considered a revenue-oriented view- OF RESOURCES
point of the product life cycle that empha- REQUIRED TO
sizes sales revenue behavior. PRODUCE AND
Both life cycle viewpoints can offer the DISTRIBUTE A
firm useful insights. Life cycle costing is PRODUCT — WHILE
COST PLANNING
primarily based on cost life cycle, and FOCUSES ON
thus can be used to manage costs at the RESOURCE USAGE
design stage where the cost consequences AND NOT
of incor porating par ticular designs or SPENDING —
processes in a product can be seen at an HOW TO USE
RESOURCES IN
early stage. The fact that most of the man- A WAY THAT
ufacturing stage costs are determined in MINIMIZES
the design stage indicates the need for PRODUCT COST.
total cost management led by target cost-
ing. On the other hand, the sales life cycle
prov ides a b as is for pr ic ing pro duc t s
strategically, based on competitor and
customer actions. Strategic pricing requires
the product selling price to reflect cus-
tomers’ willingness to pay for a product
in relation to the value received.
Target costing
Target costing is a cost management tool
used in the design stage to manage the
whole product cost, as well as a profit man-
a g e m e nt t e c h n i q u e t h at e n s u re s n e w
product is sufficiently profitable to jus-
tif y its production. Target costing star ts
with the determination of the target cost
and continues w ith achiev ing that cost.
The first step, determining the target
cost, is triggered by understanding cus-
tomer specifications for a product. Cus-
tomers’ subjective preferences should be
t ranslated into a numb er of objec t ive
desig n requirements that can b e then
communicated to desig n and produc-
tion teams. Quality function deployment
(QFD) translates customer preferences
into technical attributes through a matrix
summar izing infor mat ion on pro duc t
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.................................................................................................................................................................................
functions and their associated customer
rankings. 1
The allowable target product cost can
be calculated as the difference between
the t arget sel ling pr ice and the profit
margin. The target selling price is estab-
lished based on customer value, which
can be defined based on the customers’
w illingness to pay for that product in
relation to the customers’ perceived value.
Then, the target profit margin is set rel-
at i ve t o t h e f i n a n c i a l r at e o f r e t u r n
required by the firm. The allowable cost
represents the cost at which the product
mu s t b e m a nu f a c t u re d s o t h at i t c a n
achieve the target profit margin when
sold at the target price.
The second step in the target-costing
process is achieving the target cost. The
firm’s cost information is examined so
that a product’s drifting cost can be
estimated. Since drifting cost con-
THUS, A PRODUCT’S
COST PLANNING AND
siders the product’s current design
REDUCTION EFFORTS as well as the firm’s current and new
CANNOT BE manufac t ur ing c ap abi l it ies, cost
DETERMINED IN tables are used in identif y ing the
ISOLATION FROM dr if t ing cost , s ince t he y cont ain
OTHER PRODUCTION-
RELATED CHOICES,
detailed estimates of the costs of
SUCH AS PRODUCT various parts or activities depend-
MIX AND CAPACITY. ing on the materials and manufac-
t u r i ng me t ho d s a nd f u nc t ions
involved. The difference between the drift-
ing and allowable costs, the cost gap, is tar-
geted for cost reduction. 2
The firm must decide whether and how
the allowable cost level can be achieved.
The target cost can only be attained at the
component level, since customer and mar-
ke t forc e s p l a c e pre s s u re on pro du c t
design, which then places pressure on
components. Accordingly, target costing
employs such techniques as value engi-
neering to support attaining the target
cost by revealing cost reduction poten-
tials at the component level and show ing
ways to transform those potentials into
design alternatives. Value engineering is
used to study the relationship between a
product’s functions and the costs incurred,
to find the appropriate mix that enhances
product value and maintains similar, or
even better, quality. Based on the results
of value eng ineer ing , it is possible to
change a product’s or component’s design,
use fewer parts, substitute new, less expen-
40 COST MANAGEMENT
sive materials, or modif y and improve
the manufacturing process.
Kaizen costing
Once a product enters production, further
attempts to improve its quality and reduce
its cost are performed through continu-
ous improvement efforts, such as kaizen
costing. Target costing and kaizen cost-
ing are used as complementar y methods
to continually reduce costs and improve
value. While target costing applies to the
product design stage, kaizen’s incremen-
tal approach is appropriate for the man-
ufacturing stage, where the effects of value
eng ineer ing and improved desi g n are
already in place. Typically, a firm responds
to competitive pressure by periodically
redesigning products using target costing
so that it can simultaneously reduce the
selling price and improve value. The role
of kaizen costing comes next, after target
costing is in effect. In the time between
product redesigns, the firm uses kaizen cost-
ing to reduce product cost in the manu-
f a c t u r i ng pro ce s s by i mprov i ng b ot h
manufacturing methods and productiv-
ity programs.
Theory of constraints
Discussions of target costing generally
focus on a single product, although firms
t y pic a l ly pro duce mu lt iple pro duc t s .
Thus, discussions of target costing fail
to mention the impact of how product
and production interdependencies affect
product analysis w ith target costing. 3 In
addition, target costing ignores the fact
that bottlenecks may exist in a produc-
t i on pro c e s s w h e re s u c h b o t t l e n e c k s
would result in not meeting the product
mix required. Thus, a product’s cost plan-
ning and reduc t ion effor ts c annot b e
determined in isolation from other pro-
duction-related choices, such as product
mix and capacit y.
The TOC is one of the key methods used
to manage bottlenecks in the manufac-
turing process, to improve the speed of
a firm’s operations, reduce cycle time, and
speed up product flow. The TOC employs
five steps to achieve its goal of improv-
ing organizational performance through
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fo c u s i ng at te nt ion on t he b ot t l e n e ck
resources. First, the constraint is iden-
t i f ie d , w he t he r it i s a n ex te r n a l con -
straint, perhaps related to suppliers or
market demand, or an internal constraint
related to capacit y. Second, the identi-
fied const r aint is cor rec ted to ensure
full productive utilization is put in place. 4
Since the constraint will set the pace for
the entire production process, the third
step is to make sure that all other resources
and processes focus on performing tasks
in such a way that the planned flow through
the constraint is supported. 5 Each non-
const rained component of the system
must be adjusted to support the maxi-
mum effectiveness of the constraint.
The preceding steps of TO C imple-
mentation are the basis for scheduling
production in the short term. The TOC
employs the drum–buffer–rope (DBR)
system to keep the production flow suffi-
ciently reliable to satisfy demand, and to
manage any bottlenecks and improve oper-
ational performance. 6 The DBR process
begins with identifying the drum, which
is the firm’s constrained resource or bot-
tleneck operation that determines the out-
put rate of the whole system. Once the
bottleneck is ident ified, it must never
remain idle. The buffer represents the
work-in-process inventory needed to keep
the bottleneck busy for a specified time inter-
val. Since the drum sets the pace for the
full production process, the production flow
before the drum should not overload the
bottleneck. The rope represents the syn-
chronization mechanism that drives the flow
of materials to the drum operation. 7
The fourth step in TOC implementa-
tion is to elevate the constraint. If the
existing bottleneck is still the most crit-
ical resource in the system, relaxing the
constraint w ill result in improv ing its
performance, and consequently improv-
ing the system’s over a l l per for mance.
Management can do this in various ways,
such as adding capacity to the bottleneck
or outsourcing all or part of the bottle-
neck operation. However, this is not the
end of the process, since no solution is
appropriate for all occasions and in all sit-
uations. After improving the constraint,
a new constraint could emerge and must
be improved. Accordingly, improvement
RESOURCE CONSUMPTION ACCOUNTING
.................................................................................................................................................................................
must be an ongoing process, and the cycle
of managing constraints w ith respect to
a possible new bottleneck is repeated,
leading to successive improvements in
the firm’s operations and performance. 8
Cost-planning framework
Cost planning focuses on planning the
usage of resources devoted to producing
a product so that resource consumption
is minimized while maintaining the func-
tionalit y required by customers. Since
required components and resource con-
sumption are identified and can only be ALTHOUGH MOST
modified at the product design stage, most COST REDUCTION
EFFORTS ARE
of a product’s total life cycle costs are CONSIDERED AT
determined by decisions made in the design THE DESIGN
stage. Therefore, the main objective of tar- STAGE, THERE IS
get costing in the design stage is to deter- STILL POTENTIAL
mine the desired product cost that satisfies FOR COST
REDUCTION
customers with selling price, quality, and AT THE
functions, as well as satisfying management MANUFACTURING
through acceptable return. Life cycle cost- STAGE.
ing supports target costing to control costs
at all phases of product life.
Although most cost reduction efforts are
considered at the design stage, there is
still potential for cost reduction at the
manufacturing stage. Kaizen costing is
appropr iate where the effects of value
eng ineer ing and improved des i g n are
already in place; thus, kaizen costing com-
plements target costing in continually
reducing costs and improving value. On
the other hand, the TOC would help solve
the problem of bottlenecks through sched-
uling production w ith a DBR model to
set the pace of production and improve
flow. The TOC identifies the optimal prod-
uct mix that should be produced — con-
sidering current production capabilities
— to maximize the total throughput.
Exhibit 1 presents the cost-planning
framework and demonstrates how cost-
planning tools at the design and manu-
facturing stages are integrated to provide
information relevant for decisions related
to planning product costs.
Exhibit 1 shows that target costing is
the main player in cost planning, where
other cost-planning tools support target
costing with the information necessar y
for determining the planned product cost.
Life cycle costing provides information for
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.................................................................................................................................................................................
determining the total product’s life cycle
drifting costs, as well as information on
where the attainable cost reduction could
be achieved in a product’s life cycle. On
the other hand, kaizen costing supports
target costing with information on poten-
tial cost savings that could be achieved in
the manufacturing stage.
The TOC supports target costing with
information on existing bottlenecks and
how they can be managed to produce
t he pro du c t m i x cons ide r i ng c u r re nt
production capabilities. In addition, the
RCA SEEKS A TO C prov ides information on potential
MORE PRECISE cost sav ings at the manufacturing stage
UNDERSTANDING
OF RESOURCE
as a result of handling the bottlenecks.
ELEMENTS, While the TOC provides information on
LEADING TO b ottlenecks that should b e exploited,
BETTER kaizen costing highlights ways to exploit
MANAGEMENT such bottlenecks. Once the bottleneck is
OF LIMITED
RESOURCES.
handled and the DBR system is imple-
mented, speed and efficiency at the bot-
t l e n e c k a r e i mp r ove d , c yc l e t i m e i s
reduced, and thus manufacturing costs
could also be reduced.
Cost management information is criti-
cal in cost planning and capacity man-
agement. Thus, the cost-planning framework
requires superior information that sup-
ports identifying resource consumption
and cost behavior as well as isolating the
unused capacity for capacity management.
Hence, RCA appears to be a useful tool for
cost planning and capacity management
through quantitatively identif y ing and
planning resource usage.
RCA
RCA is fundamentally resource-based,
focusing the analysis on resource flow
from and among groups of resources to the
final consumer of these resources. RCA
focuses on first following resource flow,
then costs can be analyzed. Costs are fun-
damentally tied to the flow of resources
and outputs of resource pools throughout
the organization. If the operational resource
flows are accurately modeled, costs can
be accurately modeled. Based on the iden-
tified interrelationships between resource
pools, RCA digs down to the resource level
to provide superior information on how
resources are consumed, then costs can
be accurately determined. 9
42 COST MANAGEMENT
Efficient RCA modeling requires first
establishing resource pools and identi-
f y ing output measures for each resource
pool. After that, the resource pool inter-
relationships and resource consumption
patterns are identified. Based on resource
consumption information and the quan-
tity structure isolation of unused capac-
i t y, c o s t m o d e l i n g f o l l ow s r e s o u r c e
modeling; product costs can be accu-
rately determined, and the cost of unused
capacit y can be accurately isolated.
Establishing resource pools and
identifying output measures
The first step in RCA modeling is to estab-
lish resource pools, in which each resource
pool produces a homogeneous output
measure. RCA seeks a more precise under-
standing of resource elements, leading to
better management of limited resources.
Each type of resource has fundamental
characteristics that help demonstrate how
it c a n b e p o ole d w it h ot he r t y p e s of
resources, where they collectively pro-
duce a homogeneous output measure for
that resource pool. Fundamental charac-
teristics of resources include:
• Capability. Each resource is able to
perform a par ticular task, thus
resources that could be integrated
to perform that task are grouped
into one resource pool. For exam-
ple, machine maintenance, techni-
cians, and materials are grouped
into one resource pool. Similarly,
materials and their handling are
combined into one resource pool.
• Capacity. RCA employs a theoretical
capacit y of resources that breaks
capacit y dow n into three categories:
productive, idle/excess, and waste.
Each resource pool should combine
resources whose theoretical capac-
it y can be measured so that the level
of unused capacit y can be effi-
ciently managed.
• Cost structure. Resource costs
reflect resource characteristics,
since they are fundamentally tied to
the flow of resources and resource
pool outputs. Each resource pool
should combine the characteristics
of included resources and produce a
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EXHIBIT 1 Cost-planning Framework
homogeneous output that transfers
those costs to other resource pools
or the final outputs. The behav ior of
the transferred cost reflects how a
resource pool’s output is consumed
at the consumption point. 10
When designing an effective activit y-
based costing (ABC) system, Cooper and
Kaplan introduced three rules in the def-
inition of activ ities to examine the
demands par ticular products place on
resources. 11 Similarly, RCA focuses on
quant it y st r uc ture and how res ources
are consumed; thus, the follow ing four
rules should guide the process of group-
ing resources to establish resource pools:
• Focus on expensive resources. The
most expensive resources should be
handled as separate resource pools.
Erroneous attribution of such
resource outputs and costs to inter-
mediate and final cost objects
would significantly distor t product
cost. For instance, some t y pes of
machines are considered expensive
resources and prov ide unique ser-
v ices to the product that cannot be
performed by other machines. Such
machines, therefore, should be
given special attention and handled
RESOURCE CONSUMPTION ACCOUNTING
.................................................................................................................................................................................
as a resource pool. Depreciation
and supplies for such machines are
grouped together, where supplies
represent such items as the power
used to operate the machines as well
as the coolants and lubricants used.
• Emphasize resources whose consump-
tion varies significantly by products.
Products are diverse in consuming
resource pools’ outputs. Thus, infor-
mation on resource consumption
patterns should be available. For
instance, some types of machines are
used for specific purposes as in the
case of special orders. Such machines
should be grouped in separate
resource pools, so that the output of
those resource pools can be accu-
rately tracked to the consumer.
• Focus on resources whose inherent
consumption patterns differ at the
consumption point. Resource costs
may be inherently fixed, propor-
tional, or a portion of both. Resource
costs are classified as fixed or pro-
portional based on the correlation
between a resource pool’s input and
output quantities. The cost would be
fixed if the input is incurred regard-
less of changes in the level of the
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.................................................................................................................................................................................
consumption output, while it would
be proportional if the demand for
input changes. However, the potential
nature of proportional costs may
change at the point of resource con-
sumption. A resource that is normally
acquired proportionately can be used
in a fixed manner (i.e., consumption
is constant regardless of output, such
as the electricity used for lights that
are always on).
• Combine like resources in a single
resource pool. It is reasonable to add
various small-value resources
together in a resource pool rather
than adding them to larger pools.
Similarly, components obtained
from a single vendor can be
grouped into one resource pool. In
producing washing machines, for
example, different electric compo-
THE POOLING OF nents acquired such as w ires, plugs,
INTERRELATED fuses, capacitors, knobs, spin
RESOURCE
timers, and wash timers are grouped
ELEMENTS
CONTRIBUTES in a single resource pool. Each elec-
TO MORE tric component indiv idually repre-
HOMOGENEOUS sents a small value. While such
RESOURCE POOLS components are capable of perform-
WITH MORE
ing unique functions, their capacit y
ACCURATE OUTPUT
MEASURES. could be determined by their avail-
able quantities, and their associated
costs can be easily determined.
After resource pools are established,
a homogeneous output measure is iden-
tified for each resource pool. The pool-
i ng of i nter relate d re s ou rce element s
c o nt r i b u t e s t o m o r e h o m o g e n e o u s
resource pools w ith more accurate out-
put measures. Choosing the relevant out-
put measure would be more difficult in
hy br id resource pools containing dif-
ferent t y pes of resources (i.e., labor and
machiner y). The quality control resource
pool, for example, combines labor and
testing operators, based on their oper-
ational capabilit y and the work princi-
ple. Accordingly, costs associated with such
hybrid resource pools include both fixed
and propor tional buckets in relation to
the resource pools’ outputs. The fixed
bucket includes salaries and depreciation
of m ach i ne s i nvolve d , w h i le t he pro -
por tional bucket includes labor, wages,
a n d s uppl i e s . Si nce co s t s of g roup e d
resources are traced based on the rele-
44 COST MANAGEMENT
vant output measure of a resource pool,
testing hours would be the relevant out-
put measure for such a resource pool.
Identifying resource consumption and
isolating unused capacity
The second step in RCA modeling is to
ident if y how t he out put s of dif ferent
resource pools are consumed by other
res ource pools and the final produc t.
Op er at iona l re s ou rce f lows and t heir
a s s o c i ate d c o s t s a re m o d e l e d f rom a
resource pool to intermediate and final
consumers based on the follow ing three
modeling principles prov ided by RCA:
• Causality. RCA can provide a consis-
tent view of resource consumption
and cost behavior through the causal-
ity principle. In this way, RCA seeks
to model the causal relationship
between the driver, which is mea-
sured quantitatively, and the underly-
ing cost. By correlating required
inputs with outputs, arbitrar y alloca-
tions based on percentages or mone-
tar y values are eliminated.
• Responsiveness. RCA governs
resource pools’ interrelationships,
whether fixed or propor tional, and
recognizes the possible changing
nature of costs when outputs are
consumed through the responsive-
ness principle. Compliance w ith
causalit y is ensured through
describing the relationship between
a par ticular resource pool’s output
and its consumption of input quan-
tities from other resource pools.
• Work. Activities are included in the
RCA model only when they provide
critical and ongoing information
needed by managers. However, activ-
ities must have quantity-based dri-
vers that provide capacity
information and must consume
inputs in a quantitative manner. In
packaging, for example, resources
such as labor, strapping machines,
and packaging cartons can be aggre-
gated into a packaging resource pool
(previously known as packaging
activity) whose output can be mea-
sured in quantitative terms, such as
hours of packaging consumed. 12
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RCA recognizes that interrelationships
among resource pools are ac tual con-
sumption relationships that reflect the
causality principle, where the consump-
tion rates represent such relationships.
Resource quantities are monetized based
on the fixed/proportional consumption rela-
tionships. According to the responsiveness
principle, RCA employs a separate cost
assignment rate for each of the fixed and
proportional buckets. For each resource
pool, the planned output quantit y and
theoretical capacity should be identified
to set the resource pool’s fixed and pro-
portional rates used for cost assignments.
The fixed rate is equal to the total fixed
cost for a resource pool divided by that
pool’s theoretical capacity. The propor-
tional cost rate is obtained by dividing
the resource pool’s total proportional cost
by its planned output quantity.
After resource consumption is identi-
fied, the unused capacity, whether idle,
excess, or waste, can be accurately mon-
etized based on the identified propor-
tional and fixed rates. Capacity resides
in resources, thus managing capacity is the
basis for effectively managing costs. By
employ ing the theoret ical capacit y of
resources, RCA emphasizes making unused
capacity visible so that capacity can be man-
aged. Theoretical capacity provides man-
agement with complete disclosure of the
resources available so that complete capac-
ity can be managed. The degree to which
capacity has been used when compared to
the amount available presents a readily
visible accounting for unused resources.
RCA-based cost-planning framework
The combination of RCA’s operational sys-
tem and quantit y structure and its abil-
ity to recognize the inherent and changing
nature of costs prov ides the foundation
for produc t cost ing and res ource and
capacit y planning. The abilit y to isolate
unused c ap acit y at t he res ource le vel
prov ides a basis for planning and man-
aging the level of unused capacit y to be
r e t a i n e d , o r e ve n a c q u i r e d , f o r e a c h
resource pool. Since firms perform work
through capacity utilization, they should
tr y to understand capacit y demand as
early as possible so that operations and
RESOURCE CONSUMPTION ACCOUNTING
.................................................................................................................................................................................
production planning can begin to focus
on the best use of capacit y.
RCA implies operational planning of
resources and how the outputs of resource
pools are consumed by each other as well
as by final products. Although both the
resource quantities and their associated
costs are necessary to support execution
of a given strategy or plan, a quantity struc- RCA IMPLIES
ture, along with the RCA view of the nature OPERATIONAL
PLANNING OF
of costs, forms the foundation of planning. RESOURCES AND
Integrating RCA within the cost-plan- HOW THE OUTPUTS
ning framework w ill improve the cost- OF RESOURCE
p l a n n i n g p r o c e s s by i mp r ov i n g t h e POOLS ARE
information prov ided by the cost-plan- CONSUMED BY
EACH OTHER AS
n i ng f r a me wor k to re f le c t , i n a more WELL AS BY FINAL
accurate manner, where and how to focus PRODUCTS.
efforts to achieve cost targets, and where
and how to handle bottlenecks and plan
for the ideal level of capacit y.
E x h ibit 2 pre s e nt s a co s t - pl a n n i ng
framework based on an RCA approach.
The exhibit demonstrates that cost plan-
ning is based on three dimensions: prod-
uc t cost planning , capacit y planning ,
and process improvement. RCA is inte-
g r at e d w i t h c o s t - p l a n n i n g t o o l s t o
improve the infor mat ion prov ided by
the cost-planning framework.
Product cost planning
The cost-planning process star ts w ith
product cost planning, which is performed
using target costing and life cycle costing
at the product design stage. The main
objective beyond using these tools is to plan,
throughout the product’s life cycle, cost
reductions that will both satisfy customer
requirements and meet the firm’s target
profit. This objec t ive is accomplished
through identif y ing the allowable cost
and the life cycle drifting cost, and thus
the cost gap. All subsequent efforts are
focused on achieving the allowable cost.
RCA is a consumption-based approach
t h at fo c u s e s on t he consu mp t ion of
resource pool outputs by other resource
pools and the final product. To determine
resource requirements, product demand
is first established in quantitative terms
and then converted into resource require-
ments. When integrated with target cost-
ing, RCA maps the resource quantities
projected to be consumed among resource
MAY/JUNE 2018 COST MANAGEMENT 45
ZMCM-18-05-38-El-Helbawy-RCA_ZMCM Article-R 4/26/18 2:40 PM Page 46
.................................................................................................................................................................................
pools and the final product. Moreover,
RCA provides information on resource
consumption patterns at the point of con-
sumption, whether fixed or proportional.
The integ rat ion of RCA w ith target
costing helps improve the achievement
of target costs. Based on the resource map
and the unit standards of resource con-
sumption, a product’s drifting cost can be
CAPACITY MUST calculated. RCA improves the estimation
BE PLANNED AND of the product’s drifting based on its cur-
MANAGED BEFORE
rent design and the firm’s current and
MANUFACTURING,
SINCE THE new manufacturing capabilities, which
PRODUCT COST- w ill result in an accurate determination
PLANNING of the cost gap. In addition, RCA can be
DECISIONS converted to feedforward mode to deter-
CANNOT BE
mine the effect of alternative product and
DETERMINED
INDEPENDENTLY process designs on resource consump-
OF THE PRODUCT tion and thus can improve the procedures
MIX AND utilized in attaining the target cost.
CAPACITY After determining the cost gap, it is
DECISIONS.
time to determine where and how to close
it and achieve the target cost. By inte-
g r at ing v a lue eng ineer ing w it h RCA’s
resource v iew, RCA prov ides a map of
resources for alternative product designs.
Value engineering , on the other hand,
should focus on the possibility of reduc-
ing the product’s consumption of expen-
sive res ources or the res ources w hose
consumption varies significantly by prod-
uct, while maintaining product perfor-
mance and functionality.
The relat ionship b etween RCA and
t a r g e t c o s t i n g i s n o t u n i d i re c t i o n a l .
Rather, target costing, based on results
of QFD and value engineering, mandates
the use of specific resources to achieve
the target cost and still satisf y the cus-
tomer. A change in demand for resources
may reflect the changing nature of their
consumption by the product. In this way,
target costing enhances the feedfor ward
ability of RCA to assist in managing costs
for future products or models.
Process improvement
Despite the role of kaizen costing in con-
tinuous improvement of the manufactur-
ing process, such improvement requires
that a firm’s processes identify internal
process limitations and opportunities com-
pared to best practices, whether internally
or externally. A firm should identify its
46 COST MANAGEMENT
critical success factors, study the best prac-
tices of other firms for achieving such fac-
tors, and then implement improvements to
match or beat best practice performance.
Benchmarking complements kaizen cost-
ing in identifying opportunities for improve-
ment in internal processes, which will lead
to superior performance. When the results
of an internal process are compared to the
best practice, and the benchmark is not
achieved, that indicates the existence of
non-value-added activities in the process.
Thus, benchmarking supports kaizen cost-
ing through identify ing the non-value-
added activities to be eliminated. 13
Based on the results of benchmark-
ing, RCA can support kaizen costing and
process improvement through identif y-
ing the resource quantities involved in
non-value-added activ ities that should
be reduced, so that their costs can be
saved. Hence, RCA can enhance contin-
uous improvement through identif y ing
the resource quantities that should be
reduced for continuous improvement.
Capacity planning
Capacity planning is another major dimen-
sion of the cost-planning process. Capac-
ity must be planned and managed before
manufacturing, since the product cost-
planning decisions cannot be determined
independently of the product mix and
capacity decisions. The TOC is the main
tool used in capacity planning to provide
information on existing bottlenecks and
how they can be exploited by identifying
the optimal product mix based on current
capacity and production capabilities so
that total throughput is maximized.
Once a pro duc t’s res ource require-
ments have been determined, they should
be checked against the available resource
capacit y for each resource pool, to give
early notification on which resource pool
w ill be a bottleneck. Since RCA employs
theoretical capacit y, and unused capac-
ity can be isolated, the bottleneck resource
pool can be identified as the pool where
there is no possible idle/excess capacit y
(i.e., the demand for its output is greater
t h a n it s c ap a c it y ) . RC A prov ide s t he
TO C w ith information on the capacit y
utilization required to meet demand for
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ZMCM-18-05-38-El-Helbawy-RCA_ZMCM Article-R 4/26/18 2:40 PM Page 47
EXHIBIT 2 RCA-based Cost-planning Framework
the final product. Such information helps
identify any potential new resource pool
bottleneck dur ing the planning stage.
Once the bottleneck is ident ified, the
optimal product mix can be determined.
Un for t u n at e l y, c a p a c i t y c a n n o t b e
immediately adjusted when a bottleneck
is ident ifie d , as it wou ld b e t he most
expensive and impr ac t ica l immediate
solution. In addition, once resource con-
sumption requirements are identified,
operational balance should be achieved
b e t w e e n t h e re s ou rc e p o o l s’ ou t p u t s
required to fulfill the demand and the avail-
able capacit y of those resource pools.
O p e r at ion a l b a l a nce a mong re s ou rce
po ols requires the prov ision of suffi-
RESOURCE CONSUMPTION ACCOUNTING
.................................................................................................................................................................................
cient resource capacit y to meet the sum
o f a l l d e m a n d s p l a c e d o n t h e f i r m’s
re s ou rce s w it h a n accept able le vel of
u nu s e d c ap ac it y. T herefore , t he rel a -
tionship between RCA and the TOC can-
not b e on ly unidire c t iona l . T he TO C
prov ides a basis for early planning of
the optimal level of unused capacit y in
e a c h re s o u rc e p o o l . T h e D B R m o d e l
would prov ide this insight as follows:
• Drum. When the projected demand
on the output of a resource pool
exceeds this resource pool’s avail-
able capacit y, it is identified as the
bottleneck resource pool.
• Buffer. To protect the bottleneck
resource pool’s output from disrup-
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.................................................................................................................................................................................
tions in operations, the unused
capacit y levels of the resource pools
interrelated w ith the bottleneck
resource pool should be planned,
whether they are prov iders or con-
sumers. Those planned levels of
unused capacit y can be considered
capacit y buffers.
• Rope. The rope is the sy nchroniza-
tion mechanism driv ing the flow of
other resource pools outputs (i.e.,
materials) to the drum resource
pool at its actual rate of production.
To plan the optimal product mix that
exploits current capacity levels and opti-
mizes throughput, RCA prov ides infor-
m at i o n o n t h e c u r re nt u t i l i z at i o n of
capacit y in each resource pool, so that
the bottleneck resource pool can be iden-
tified. Based on the insight prov ided by
t h e D B R m o d e l , t h e op t i m a l l e ve l of
unused capacity that ser ves as the capac-
it y buffer in each resource pool interre-
THE RELATIONSHIP lated w ith the bottleneck resource pool
BETWEEN RCA can be determined. These buffers keep
AND THE TOC the bottleneck busy until it is elevated.
CANNOT BE ONLY
UNIDIRECTIONAL.
The integration of RCA w ith the TOC
improves the information provided by the
cost-planning framework, since it pro-
v ides more accurate information on the
cur rent process capabilit ies consider-
ing resource bottlenecks, which allows
for determining accurate drifting costs.
The integration also improves the infor-
mation prov ided by the TO C on poten-
tial cost sav ings resulting from reduced
cycle time. Moreover, the optimal prod-
uct mix as determined by the integration
of RCA and the TOC highlights the neces-
sit y to rev ise the firm’s current strateg y
for product and capacit y. The firm may
decide to revise its target cost or increase
capacit y of the bottleneck resources.
Conclusion
RCA focuses attention on resources, their
interrelationships, and how resource out-
puts are consumed. The RCA-based cost-
planning framework is based on three
d i m e n s i o n s : p r o du c t c o s t p l a n n i n g ,
capacity planning, and process improve-
ment. Product cost planning and capac-
it y planning are merged since they are
48 COST MANAGEMENT
joint decisions involving long-term com-
m it ment . In add it ion , t he f r a mework
i nd ic ate s t h at co s t pl a n n i ng re qu i re s
continually improving processes and set-
t i n g t a r g e t s t o re du c e re s ou rc e c o n -
sumption in the production process.
The integ rat ion of RCA w ith target
costing provides cost structures of design
alternatives based on a map of resource
quantities and components used at different
stages of product design. In addition, such
integration provides information on the
consumption patterns of these resources
to accurately determine the drifting cost
and how to achieve the target cost. On
the other hand, the integration of RCA
w ith the TO C reveals cur rent process
capabilities and bottlenecks considering
resource interdependencies, so that the
drifting cost and potential cost savings can
be accurately determined. Moreover, the
optimal product mix that is based on such
integration highlights whether it is nec-
essar y to revise the firm’s current strat-
egy for products and/or capacity. n
NOTES
1
Al-Qady,M. and El-Helbaw y, S., Integrating t arget
costing and resource consumption accounting, Jour-
nal of Applied Management Accounting Research
14, no. 1 (2016): 39–54.
2
Ibid.
3
Kee, R. and Matherly, M., “Target costing in the pres-
ence of product and production interdependen-
cies,” Advances in Management Accounting: Volume
2 2 . E p s t e i n , M . J. a n d Le e , J. Y. ( E d s . ) , ( B i n g l ey,
United Kingdom: Emerald, 2013): 135–158.
4
Gupta, A., Bhardwaj, A., and Kanda, A., Fundamental
concepts of theor y of constraints: An emerging
philosophy, World Academy of Science, Engineer-
5
ing and Technology 4, no. 10 (2010): 2089–2095.
Srikanth, M.L., “DBR, Buffer Management, and VATI
Flow Classification,” Theor y of Constraints Hand-
book. Cox III, J.F. and Schleier Jr., J.G. (Eds.), (New
York: McGraw-Hill, 2010): 175–209.
6
Op. cit. note 4.
7
E l - H e l b aw y, S. M . a n d E l - N a s h a r, T. M . , Ad va n c e d
Management Accounting: Cost Management
Approach [translated from Arabic]. (Tant a, Egypt:
Ghobashy Press, 2013).
8
Op. cit. note 4.
9
Op. cit. note 1.
10
White, L., Resource consumption accounting: Man-
ager-focused management accounting , Journal of
Corporate Accounting & Finance 20, no.4 (20 09):
11
63–77.
Cooper, R. and Kaplan, R.S., Measure costs right:
Make the right decisions, Har vard Business Review
66, no. 5 (1988): 96–103.
12
Clinton, B.D. and Van Der Mer we, A., Underst and-
ing resource consumption and cost behavior: Part
II, Cost Management 22, no. 4 (20 08): 14–20.
13
Op. cit. note 7.
MAY/JUNE 2018 RESOURCE CONSUMPTION ACCOUNTING
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