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.
