Manufacturers are increasingly challenged
to justify efficiency improvement investments
using financial outcomes. This can
be extremely difficult when using traditional costing
oriented toward financial reporting requirements
which does not go to the depth of many operational
metrics. This column presents a simple example
of the type of information needed to address the
common deficiencies in typical financial accounting
information. The illustrated Resource Consumption
Accounting model creates a dashboard where production can toggle a plus or minus sign to see
the monetary impact of a change in efficiency.
The model is built on detailed information
from the work centers engaged in production,
both direct and support services. Each
work center has a planned cost based on a
planned output quantity, such as the number
of machine or labor hours. Actual costs and
output quantities are collected, and the target
column shows the plan adjusted for changes in
volume/output. The relevant metric to gauge
monetary performance is actual vs. target.
Each work center can be broken down into
resource pools using the same approach. In
this example, the resource pools of the forming
work center are shown.
The model shows that the extruder resource
pool is underperforming, i.e., the actual cost is
much higher than target for the actual output
achieved. Detailed in the table are the individual
resources that make up the extruder
resource pool. Primary costs are resources
in the extruder resource pool, and secondary
costs reflect support services consumed by
the extruder resource pool. This table also provides
insight into fixed costs and proportional
costs, which vary with resource pool output.
Costs in the fixed-proportional columns are
proportional at their source but fixed to the
extruder—in this case: hours spent doing preventative
maintenance.
The granularity of this type of monetary
information, which reflects the quantitative
causal operational behavior of resources
and their outputs, allows for improvements
in efficiency of manufacturing resources to
be readily quantified without the distortions
created by pooled overhead using gross estimates
of fixed and variable costs or ignoring
capacity utilization costs, particularly
idle/excess capacity. Resource consumption
accounting and other advanced costing
approaches that embrace the Institute
of Management Accountants Conceptual
Framework for Managerial Costing focus
on reflecting causal operational information
in their monetary information.
