Resource Consumption

Fall Accounting Applied:

2004
The Clopay Case

VOL.6 NO.1

B Y S A L LY W E B B E R , P H . D . , C PA ,

IN THE OCTOBER 2004

ISSUE OF

AND

STRATEGIC FINANCE, WE

OF RESOURCE CONSUMPTION ACCOUNTING

GROUP

OF THE

CONSORTIUM

B . D O U G L A S C L I N T O N , P H . D . , C PA

FOR

(RCA)

INTRODUCED A CASE STUDY

CONDUCTED BY THE

RCA INTEREST

ADVANCED MANUFACTURING-INTERNATIONAL

(CAM-I) AT CLOPAY PLASTIC PRODUCTS COMPANY. HERE WE

PROVIDE A MORE

DETAILED DESCRIPTION OF THE CASE.

esource consumption accounting (RCA) is an

emerging management accounting method
that blends the advantages of German managerial accountings 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) systems 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 Germanbased Grenzplankostenrechnung (GPK) costassignment 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.

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

C L O PAY

AND THE

P R E - R CA S YS T E M

Headquartered in Cincinnati, Ohio, and with filmmaking operations in Kentucky, Tennessee, Germany,

FALL 2004, VOL.6, NO.1

Figure 1:

Clopay Manufacturing Process

FINISHED GOODS
EXTRUSION

...
...
...
...
...
...

SHIPPING

CONVERTING
Perforating
WIP MASTER ROLLS

...
...
...
...
...
...
Sheet Cutting

and Brazil, Clopay Plastics is a leading manufacturer of

specialty films, extrusion coatings, and laminations. Clopays 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 plants 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 sheetcutting lines, one perforator, and one rewinder. Five
departmentsshipping, materials management, quality,
maintenance, and administrationsupport the manufacturing process.
The pre-RCA Clopay standard costing system (CSC),
illustrated in Figure 2, is a relatively traditional standard
costing system. Raw-material standard costs are estab-

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

lished 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 departments 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.
T H E R CA I M P L E M E N TAT I O N P R O C E S S

The Clopay RCA implementation process started with

FALL 2004, VOL. 6, NO. 1

Figure 2:
Material Costs

Current Standard Costing System

Planned Product Sales Pounds & Projected Machine Hours

Support Departments

Indirect Labor
Support Labor
Office Supplies
Other Depreciation

3 Allocated Based on Machine Hours, Production Pounds,

Purchased Pounds, and Head Count

Production Departments

Direct Labor
Supplies and Utilities
Machine Depreciation
Allocated Overhead

Planned Machine Rates

Production & Support
Costs (Fully Absorbed)

$xx,xxx

Standard Product Cost

$xx,xxx

$xx,xxx

4
$x,xxx

$xx,xxx

$xx,xxx

5
$xx,xxx

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. Resourcepool 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 resources 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

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

$x,xxx

$xx,xxx

$xx,xxx

electricity) as related to the resource pools 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

FALL 2004, VOL. 6, NO. 1

objects. As with defining the innate nature of the

resources 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-tooutput 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.

ties, but cost is not involved in defining the consumption relationship.

Cost-assignment rates for fixed costs are based on
theoretical capacity available, and rates for proportional
costs are based on planned quantities. The costs are
shown in Table 1 as planned fixed and planned proportional costs. Cost assignment is based on resource output quantities consumed and reflects costs that are
either innately fixed or innately proportional to planned
output in accordance with the fixed or proportional
nature of the consumption quantities but allowing for
innately proportional costs to be consumed in a pattern
consistent with fixed costs as described in the previous
direct labor example.4 Hence, portions of total costs
would be considered fixed through subsequent consumption relationships.
For the calculation of secondary costs (support costs
of facilities and human resources in this example), the
consumer of the outputs (i.e., the sample department
for which the cost sheet was prepared) must consider
the proportional and fixed nature of the resource outputs for both the provider of the resource (support
departments) and the consumer (sample department).
This calculation is such that the planned proportional
cost is equal to the proportional rate for the support
department times the quantity consumed. For any
fixed-quantity consumption by the consumer, all related costs are considered fixed even if the providers
(support department) costs include both fixed and proportional components (see the total fixed-cost assigned
formula below).
Thus, RCA recognizes the principle that once a cost
is fixed, it remains fixed. A proportional cost, however,
can change to fixed based on the way output is consumed. Thus, the consuming receiver of the cost (e.g.,
sample department) can consume a resource that originally was a proportional cost (e.g., to the support department) in a fixed manner. The following symbols are
used to define how total fixed and proportional costs
attributed to a consuming department are determined
under RCA:
PRProportional budgeted rate for a resource provided
by the support department,
FRFixed budgeted rate for a resource provided by the
support department,

R CA C O S T S H E E T

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 labeled in
Table 1) is the subunit of the company where the cost
originated. This could be another production department or a support department, or, with GPK, it would
probably be referred to as a cost center/resource pool
combination.
One of the most interesting concepts illustrated by
Table 1 is the way in which fixed and proportional cost
rates are derived. This way of thinking about costs is
different from most costing systems in the United
States. RCA is based on quantity structure, which
means that all consumption relationships are defined on
the basis of quantities. Dollar cost follows these quanti-

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

FALL 2004, VOL. 6, NO. 1

Table 1:

Sample RCA Departmental Cost Sheet for Extrusion Line A*

Cost Description

Total
Cost

Fixed
Cost

Proportional
Cost

Direct Labor

500,000

100,000

400,000

Direct LaborFringe

250,000

50,000

200,000

Primary Costs: Extrusion Line A Labor Resources

Direct LaborOvertime

40,000

Secondary Costs:

Driver Type

Provider

Output

Facilities
Office Space

Resource

Facilities
Department

Office
Square Feet

Perform Human
Resources

Process

Perform
Human
Resources

Extrusion Labor Line

40,000
Fixed
Quantity

Proportional
Quantity

Unit of
Measure

4,000

4,000

300

Square Feet

90,000

90,000

25

Number of
employees

884,000

244,000

640,000

Primary Costs: Extrusion Line A Resources

Operating Supplies

100,000

100,000

Maintenance Supplies

180,000

180,000

MaintenanceOutside Service

160,000

160,000

MaintenanceEquipment Rev

40,000

40,000

MaintenanceRubber Rollers

50,000

50,000

MaintenanceTreater Roll
MaintenanceEngraver Roll
DepreciationMachinery and Equipment

500

500

40,000

40,000

850,000

850,000

Output

Total
Cost

Fixed
Cost

Proportional
Cost

Extrusion
Line A

Labor Hours
Extrusion
Line A

884,000

244,000

640,000

Resource

Facilities
Department

Factory
Square Feet

100,000

100,000

Utilities
Kilowatt Hours

Resource

Utilities

Kilowatt
Hours

150,000

Utilities
Compressed Air

Resource

Utilities

Cubic Feet
of Air

Ancillary Production
Equipment
Chiller Hours

Resource

Ancillary
Production
Equipment

Chiller Hours

Plant Maintenance

Resource

Secondary Costs

Driver Type

Extrusion Labor
(from above)

Resource

Factory Space

Provider

Proportional
Quantity

30,000

10,000

150,000

1,200,000

Unit of
Measure
Labor
Hours
Square Feet
Kilowatt
Hours

7,000

5,500

1,500

13,000

Cubic Feet

60,000

20,000

40,000

13,000

Chiller
Hours

Plant Engine- Maintenance 325,000

ering and
Labor Hours
Maintenance

150,000

175,000

6,000

2,946,500

1,369,500

1,577,000

Total
Rate

Fixed
Rate

Proportional
Rate

29.4667

8.1333

21.3334

Total Extrusion
Line A Cost:
Resource Pools

Driver

Fixed
Quantity

Description

Unit of
Measure

Dept. Labor

Extrusion
Labor

Hours

Dept. A
Total
Resources

Extrusion
Machine

Hours

294.65

136.95

157.70

* All amounts in this table are fictitious and are included for illustration purposes only.

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

FALL 2004, VOL. 6, NO. 1

Capacity
Quantity

Maintenance
Labor Hours

Budgeted
Quantity

Scheduled
Quantity

30,000

30,000

10,000

9,500

PQCProportional quantity of a resource consumed by

perform administration activities did not show a causal relationship so were not assigned to products.
Using the RCA method described above, costs were
assigned to 59 hygiene and healthcare products produced by the plant. Two versions were compiled: The
first version of cost assignment was based on the CSC
denominator volume and calculated all cost rates (fixed
as well as proportional) on the same basis (i.e., planned
output). The second version of cost assignment calculated rates using the denominator levels suggested by
RCA (i.e., planned output for proportional and theoretical
capacity for fixed) for denominator volume and also used
replacement cost depreciation. This was done so that
separate comparisons could be made between the CSCgenerated costs/margins and the two RCA-generated
costs/margins results. Comparison using planned output
for RCA would thus reveal cost-assignment differences
that resulted purely from the RCA cost-assignment logic (i.e., method features) without considering the effects
of denominator volume or the effects of cost differences
due to the use of replacement cost depreciation.

the receiving sample department, and

FQCFixed quantity of a resource consumed by the

receiving sample department.

The formulas for determining proportional and fixed
cost are:
Proportional Cost Assigned = PCQ * PR
Total Fixed Cost Assigned = (FQC * FR) + (FQC *
PR) + (PQC * FR)
Partial examples of the more complicated calculation
of fixed cost assigned would be required for four of the
secondary costs of the Extrusion Line A Total
Resources section of Table 1. These include (1) Extrusion Labor, (2) UtilitiesCompressed Air, (3) Ancillary
Production EquipmentChiller Hours, and (4) Plant
Maintenance. For each of these four items, the sender
provides both fixed and proportional costs while the
receiver consumes the resources in a proportional manner. In this case, the sample department is consuming
both proportional and fixed costs in a proportional manner. The proportional cost would be calculated as
(PQC * PR). The fixed cost, however, would be equal
to (PQC * FR). For example, the secondary cost of
extrusion labor would be equal to a proportional cost of
$640,000 (30,000 hours x $21.3334) plus a fixed cost of
$244,000 (30,000 x $8.1333), for a total of $884,000.
In summary, once costs are broken down into their
fixed and proportional components, a cost rate is developed for both elements. Costs are then assigned based
on the quantity structure and rates determined in the
manner in which the resources are consumed.

COST

M A R G I N C O M PA R I S O N S

Table 2 compares conversion cost per pound for each of

the 59 products in the case using the CSC and the two
RCA methods. The respective columns are titled CSC,
MB RCA (master-budget version), and RC RCA (with
replacement cost depreciation). MB RCA designates
the version using planned output, while RC RCA
denotes the version using theoretical capacity and
replacement cost depreciation. The last three columns
of the table show differences between the costs per
pound given the different methods. Table 3 provides a
similar presentation constructed from the same cost
data, but it compares contribution margin (CM) per unit
for each of the products. In the Table 3 CM comparison, only CSC and RCA are shown. As CM involves only
the proportional cost, both types of RCA compared earlier will produce identical results. That is, the RC version of RCA uses theoretical capacity for fixed costs
only (proportional costs follow planned quantities), and
depreciation is a fixed cost regardless of RCA type.
As shown in Table 2, several products have significant
differences in cost per pound between the CSC and
RCA methods. In most cases, the differences between

R CA A P P L I E D

In the Clopay case, the procedures were conducted as

described above. A storyboard was constructed that
mapped relationships and identified 27 different resource
pools for the Augusta plant. Then, for each of the departments, a cost sheet was developed in which quantitybased relationships were defined and fixed and
proportional cost rates were developed. Eight activities
were defined for the three support departments of materials management, quality, and shipping. In addition, three
activities were defined for the administration department,
but only the perform human resources activity was used in
assigning costs to products. The perform accounting and

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

AND

FALL 2004, VOL. 6, NO. 1

Table 2:
Product
#

MB RCA
Cnv Cost

Cost Comparison Sheet*

Product
Type

Dept(s)

RC RCA
Cnv Cost

CSC
Cnv Cost

HC

225

0.46

0.42

0.38

HC

225

0.45

0.41

0.37

HC

225

0.53

0.48

HC

225

0.53

0.48

HC

225

0.60

HY

225

0.66

HC

225

HC

221

HY

10

HY

11
12

Material
Cost

CSC less
MB RCA

CSC less
RC RCA

MB RCA less
RC RCA

0.55

-0.08

-0.04

0.04

0.63

-0.08

-0.04

0.04

0.45

0.49

-0.08

-0.03

0.05

0.45

0.96

-0.08

-0.03

0.05

0.55

0.52

0.74

-0.08

-0.03

0.05

0.61

0.58

0.52

-0.08

-0.03

0.06

0.53

0.48

0.46

0.64

-0.07

-0.02

0.05

0.19

0.20

0.2

0.43

0.01

0.00

-0.01

221

0.19

0.20

0.2

0.47

0.01

0.00

-0.01

221

0.21

0.23

0.23

0.46

0.02

0.00

-0.01

HY

221

0.21

0.23

0.23

0.46

0.02

0.00

-0.01

HY

221

0.21

0.22

0.23

0.49

0.02

0.00

-0.01

13

HY

221

0.19

0.20

0.21

0.50

0.02

0.01

-0.01

14

HY

221

0.19

0.20

0.21

0.52

0.02

0.01

-0.01

15

HC

221

0.21

0.23

0.24

0.43

0.03

0.01

-0.01

16

HY

221

0.25

0.27

0.29

0.48

0.04

0.02

-0.02

17

HY

221

0.23

0.25

0.27

0.46

0.04

0.02

-0.02

18

HC

221

0.24

0.26

0.28

0.48

0.04

0.02

-0.02

19

HC

223

0.41

0.43

0.46

0.49

0.05

0.03

-0.02

20

HC

223

0.42

0.45

0.48

3.61

0.06

0.03

-0.02

21

HC

223

0.45

0.47

0.51

0.54

0.06

0.04

-0.02

22

HC

223

0.45

0.47

0.51

3.47

0.06

0.04

-0.02

23

HC

223

0.46

0.49

0.53

0.69

0.07

0.04

-0.02

24

HC

223

0.48

0.51

0.55

0.57

0.07

0.04

-0.02

25

HC

223

0.49

0.52

0.56

1.89

0.07

0.04

-0.02

26

HC

223

0.56

0.59

0.64

1.68

0.08

0.05

-0.03

27

HY

221

0.31

0.33

0.38

0.38

0.07

0.05

-0.02

28

HC

225

1.93

1.75

1.80

1.27

-0.13

0.05

0.18

29

HC

223

0.52

0.54

0.60

0.72

0.08

0.06

-0.03

30

HC

223

0.56

0.59

0.65

2.51

0.09

0.06

-0.03

31

HC

223

0.59

0.62

0.69

0.64

0.10

0.07

-0.03

32

HC

223

0.55

0.58

0.66

0.24

0.11

0.08

-0.03

33

HY

221

0.35

0.38

0.46

0.49

0.11

0.08

-0.03

34

HY

223

0.64

0.67

0.77

2.41

0.13

0.10

-0.03

35

HC

223

0.82

0.86

0.98

13.71

0.16

0.12

-0.04

36

HY

225, rew

1.90

1.24

1.38

0.62

-0.52

0.14

0.66

37

HY

225, rew

2.03

1.36

1.51

0.55

-0.52

0.15

0.67

38

HC

223

1.02

1.08

1.25

1.51

0.23

0.17

-0.06

39

HY

222

0.62

0.41

0.63

0.70

0.01

0.22

0.21

* All amounts in this table are fictitious and are included for illustration purposes only. They are, however, representative of the actual results
found in the case.

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

FALL 2004, VOL. 6, NO. 1

Table 2: Cost Comparison Sheet (continued)

Product
#

Product
Type

Dept(s)

MB RCA
Cnv Cost

RC RCA
Cnv Cost

CSC
Cnv Cost

Material
Cost

CSC less
MB RCA

CSC less
RC RCA

MB RCA less
RC RCA

40

HC

223

1.21

1.27

1.5

7.72

0.29

0.23

-0.07

41

HC

224

1.58

1.66

1.89

1.31

0.31

0.23

-0.08

42

HC

222

0.65

0.43

0.66

0.90

0.01

0.23

0.22

43

HC

222

0.65

0.43

0.66

2.30

0.01

0.23

0.22

44

HC

224

1.70

1.79

2.04

1.36

0.34

0.25

-0.09

45

HC

224

1.80

1.89

2.16

1.36

0.36

0.27

-0.09

46

HC

223

1.45

1.53

1.81

2.73

0.36

0.28

-0.08

47

HC

222

0.76

0.49

0.79

0.67

0.03

0.30

0.27

48

HC

223, cut 60

0.50

0.77

1.11

1.37

0.61

0.34

-0.27

49

HC

222

1.00

0.65

1.05

3.61

0.05

0.40

0.35

50

HC

222

1.00

0.65

1.05

0.22

0.05

0.40

0.35

51

HC

222

1.00

0.65

1.05

2.01

0.05

0.40

0.35

52

HC

223, cut 55

2.52

2.14

2.55

2.95

0.03

0.41

0.38

53

HC

224

2.59

2.73

3.15

3.39

0.56

0.42

-0.13

54

HC

223, cut 55

2.95

2.38

2.81

1.90

-0.14

0.43

0.57

55

HC

223, perf

1.15

0.94

1.44

1.08

0.29

0.50

0.21

56

HC

223, cut 55

3.44

2.75

3.27

1.44

-0.17

0.52

0.68

57

HC

223, cut 55

3.46

2.90

3.48

2.95

0.02

0.58

0.56

58

HC

223, cut 60

0.76

1.59

2.65

4.88

1.89

1.06

-0.82

59

HC

223, cut 60

1.45

2.23

3.38

4.37

1.93

1.15

-0.79

* All amounts in this table are fictitious and are included for illustration purposes only. They are, however, representative of the actual results
found in the case.

MB RCA and RC RCA were not very significant (i.e.,

net effect of only 6%). On a product-by-product basis,
considering the three effects of cost-assignment logic,
the capacity concept used, and the depreciation concept
used, the largest difference between the CSC and the
RC RCA result was due primarily to the use of theoretical capacity for only 11 of the 59 productsreplacement
cost depreciation accounted for the largest change in
only three of the 59 products. The reason for this is that
the general effect of theoretical capacity is to decrease
cost per unit, but the general effect of replacement cost
depreciation is to increase cost per unit. Consequently,
the two changes are somewhat offsetting. This indicates
that the largest effect of RCA on cost results is due to
the cost-assignment logic.
The CSC costs are almost always higher in total than
with either version of RCA. The MB RCA cost is

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

greater than the CSC cost for only 12 of the 59 products

in the case, while the RC RCA cost is greater than the
CSC cost for only seven of the 59 products. As shown in
Table 3, however, contribution margin was almost always
higher with the CSC than with RCA (i.e., for 54 of 59
products). This result happens because RCA identifies a
larger amount of proportional costs than the CSC
method does. The CSC classified all allocated overhead
from certain support departments as fixed, while RCA
considered each relationship in determining the fixed or
proportional nature of the support resources consumed.
This treatment of proportional costs with RCA would be
expected to increase the accuracy of cost assignment. In
addition, RCA does not assign fixed costs where causal
relationships cannot be established, which would
inevitably mean fewer fixed costs would be associated
with products using RCA than with the CSC.

FALL 2004, VOL. 6, NO. 1

Table 3:
Product
#

Selling
Price

Material
Cost

Margin Comparison Sheet*

CSC Var
Cnv Cost

RCA Var
Cnv Cost

CSC
CM

RCA
CM

RCA CM less
CSC CM

1.44

0.55

0.22

0.32

0.68

0.58

(0.09)

1.52

0.63

0.21

0.31

0.67

0.57

(0.09)

0.89

0.49

0.26

0.37

0.14

0.03

(0.11)

1.73

0.96

0.26

0.36

0.52

0.41

(0.10)

1.47

0.74

0.30

0.42

0.43

0.31

(0.12)

0.90

0.52

0.34

0.46

0.04

(0.08)

(0.13)

1.22

0.64

0.27

0.37

0.31

0.21

(0.10)

0.96

0.43

0.10

0.12

0.44

0.42

(0.02)

0.92

0.47

0.10

0.11

0.36

0.34

(0.02)

10

0.84

0.46

0.11

0.13

0.27

0.25

(0.02)

11

0.72

0.46

0.11

0.13

0.15

0.13

(0.02)

12

0.76

0.49

0.11

0.13

0.17

0.15

(0.02)

13

0.90

0.50

0.10

0.12

0.30

0.29

(0.02)

14

0.83

0.52

0.10

0.12

0.22

0.20

(0.02)

15

0.89

0.43

0.11

0.13

0.34

0.33

(0.02)

16

0.89

0.48

0.14

0.15

0.28

0.26

(0.01)

17

0.89

0.46

0.13

0.14

0.30

0.28

(0.01)

18

0.88

0.48

0.13

0.15

0.27

0.26

(0.01)

19

1.02

0.49

0.24

0.27

0.29

0.27

(0.02)

20

4.74

3.61

0.25

0.27

0.88

0.86

(0.02)

21

1.69

0.54

0.27

0.29

0.88

0.86

(0.02)

22

4.40

3.47

0.27

0.29

0.65

0.63

(0.02)

23

1.33

0.69

0.28

0.30

0.36

0.34

(0.02)

24

1.53

0.57

0.29

0.31

0.67

0.65

(0.02)

25

3.56

1.89

0.30

0.32

1.38

1.35

(0.02)

26

4.40

1.68

0.34

0.37

2.38

2.35

(0.03)

27

0.79

0.38

0.18

0.19

0.23

0.22

(0.01)

28

3.39

1.27

1.04

1.36

1.09

0.76

(0.33)

29

1.41

0.72

0.32

0.34

0.38

0.36

(0.02)

30

3.54

2.51

0.34

0.36

0.69

0.67

(0.02)

31

2.14

0.64

0.36

0.38

1.13

1.11

(0.02)

32

1.79

0.24

0.35

0.36

1.21

1.20

(0.02)

33

0.83

0.49

0.22

0.22

0.12

0.12

(0.00)

34

3.57

2.41

0.40

0.42

0.75

0.74

(0.01)

35

17.59

13.71

0.52

0.53

3.36

3.35

(0.01)

36

1.20

0.62

0.75

1.12

(0.17)

(0.54)

(0.37)

37

1.18

0.55

0.82

1.21

(0.19)

(0.58)

(0.39)

38

4.34

1.51

0.66

0.67

2.18

2.17

(0.01)

39

2.07

0.70

0.25

0.28

1.12

1.09

(0.02)

* All amounts in this table are fictitious and are included for illustration purposes only. They are, however, representative of the actual results
found in the case.

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FALL 2004, VOL. 6, NO. 1

Table 3: Margin Comparison Sheet (continued)

Product
#

Selling
Price

Material
Cost

CSC Var
Cnv Cost

RCA Var
Cnv Cost

CSC
CM

RCA
CM

RCA CM less
CSC CM

40

9.89

7.72

0.79

0.80

1.38

1.38

(0.00)

41

4.45

1.31

0.96

1.21

2.18

1.93

(0.25)

42

3.37

0.90

0.26

0.29

2.21

2.18

(0.03)

43

3.90

2.30

0.26

0.29

1.33

1.31

(0.03)

44

5.44

1.36

1.04

1.30

3.04

2.77

(0.27)

45

2.92

1.36

1.09

1.38

0.46

0.18

(0.28)

46

4.93

2.73

0.96

0.96

1.24

1.25

0.00

47

1.88

0.67

0.32

0.34

0.90

0.87

(0.02)

48

2.23

1.37

0.59

0.51

0.28

0.36

0.08

49

3.93

3.61

0.42

0.45

(0.10)

(0.12)

(0.02)

50

1.79

0.22

0.42

0.45

1.15

1.13

(0.02)

51

3.95

2.01

0.42

0.45

1.53

1.50

(0.02)

52

4.56

2.95

1.35

1.72

0.26

(0.11)

(0.37)

53

5.44

3.39

1.60

1.99

0.46

0.06

(0.40)

54

4.17

1.90

1.49

2.02

0.78

0.25

(0.52)

55

7.49

1.08

0.76

0.61

5.65

5.80

0.15

56

5.30

1.44

1.73

2.35

2.13

1.50

(0.62)

57

5.14

2.95

1.84

2.36

0.35

(0.17)

(0.52)

58

6.87

4.88

1.40

1.10

0.59

0.90

0.31

59

6.24

4.37

1.79

1.50

0.08

0.37

0.29

* All amounts in this table are fictitious and are included for illustration purposes only. They are, however, representative of the actual results
found in the case.

assigned at exactly the same rate ($200.99), regardless

of which conversion process is used (e.g., sheet cutting
or rewinding). In contrast, RCA uses different rates for
each conversion process. The specific sheet-cutter line
used for product A receives an RCA cost assignment of
$106.98, while the rewinder line used for product B
receives an RCA cost assignment of $291.84. This is a
good example of how the RCA cost-assignment logic
achieves accuracy based on the resources consumed.
There are four different processes in the conversion
area. Based on an examination of resource consumption
patterns, RCA derived a unique cost rate for each of
them. The RCA proportional rate per machine hour for
the rewinder line is more than twice the proportional
rate per machine hour for the sheet-cutter line because
the rewinder line requires more operating supplies,
higher maintenance, and a larger number of kilowatt
hours per machine hour than the sheet-cutting line.

R CA C O S T- A S S I G N M E N T L O G I C I S C R I T I C A L

The importance of the cost-assignment logic achieved

by RCA is difficult to overstate. To illustrate the issue,
Table 4 presents an analysis of cost for two products
that go through different conversion processes. In this
example we compare the CSC to the MB RCA cost to
focus on the effects of cost-assignment logic alone. Item
A is a healthcare product that goes through a sheetcutting conversion process, and item B is a hygiene
product that goes through a rewinder process. Clearly,
the resulting cost assigned to the two products is quite
different when comparing the CSC to the RCA results.
For product A, RCA produces a cost that is substantially
higher than the CSC. For product B, the opposite is
truethe RCA cost is substantially lower than the
CSC. These variations occur mainly because the CSC
and RCA assign conversion costs differently.
Using the current CSC system, conversion costs are

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

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FALL 2004, VOL. 6, NO. 1

Product Cost
Comparison Sheet*
Table 4:

The RCA fixed rate for the rewinder line is more than
three times the rate for the sheet-cutter line because of
higher depreciation spread over fewer machine hours.
The CSC rate that was the same for all four conversion
lines did not accurately reflect differences in consumption of proportional or fixed resources.
When examining the contribution margin differences
given the two methods, RCA cost assignment shows a
higher profit by nearly 60%. Product B is unprofitable
with both methods, but the contribution margin of the
CSC is more than double the amount produced from
using RCA.
The importance of the cost and margin issue is
exemplified by the value of this information to the
decision maker. In a potential outsourcing decision, a
difference of 5% to 10% in cost per unit could be the
deciding factor in whether to outsource or not. In our
example, we show differences of more than 200%. In
addition, it is likely that special-order decisions would
be impacted by the cost used in support of such a decision. There are, of course, many other uses for cost
information that we are not discussing here. These
decisions are supported accurately by RCA down to the
resource level (e.g., the machine or labor rate).

MB RCA
CSC

(Assuming Clopay
Standard Depreciation
and Planned Output)

PRODUCT A
Revenue/lb.

6.8746

6.8746

Material cost/lb.

4.8788

4.8788

Conversion CostClopay Standard

Clopay Full Cost

2.6508

Conversion Cost RCA

Department rate assignment

.7012

Product Support Costs

Maintain finished goods inv./lb.

.0094

Maintain raw materials inv./lb.

.0108

Quality assurance returns

.0101

Quality assurance testing

.0079

Ship finished goods/lb.

.0037

Store materials/lb.

.0108

Total RCA Attributable Conversion Cost

Gross Margin
Contribution Margin

.7538
-.6550

1.2419

.5900

.9000

1.1843

1.1843

.5470

.5470

PRODUCT 1 (PC096)
Revenue/lb.
Material cost/lb.

VA L U E

Conversion CostClopay Standard

Clopay Full Cost

1.5074

Conversion Cost RCA

Department rate assignment

1.9756

Product Support Costs

Maintain finished goods inv./lb.

.0047

Maintain raw materials inv./lb.

.0108

Quality assurance returns

.0101

Quality assurance testing

.0079

Ship finished goods/lb.

.0037

Store materials/lb.

.0108

Total RCA Attributable Conversion Cost

2.0236

Gross Margin

-.8701

-1.3863

Contribution Margin

-.1900

-.5800

* All amounts in this table are fictitious and are included for illustration purposes only. They are, however, representative of the actual
results found in the case.

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

OF

R E S O U R C E - L E V E L I N F O R M AT I O N

The importance of supporting decisions with cost information available at the resource level can be seen by
examining the differential product cost assignment of
two very similar machines (resources) that are used at
Clopay to make two very similar products. This example reveals the cost differential of products made on
two of the cutting machines that are used on the conversion lines.5 Product support costs are the same
between the two products for every activity except
maintain finished goods inventory, which is roughly
twice as large for one product as for the other. This cost
is allocated in producing the CSC without considering
this relationship. In fact, the current standard costing
system provides no way of tracking or considering this
relationship. For these two products, RCA costs are
higher than the CSC for one of the products but lower
for the other.
When we closely examine the costs at the resource
level (i.e., related specifically to the two machines)

11

FALL 2004, VOL. 6, NO. 1

Pre-RCA Issues and Post-RCA Features,

Results, and Demonstrated Benefits
The use of replacement cost depreciation and theoretical capacity produced offsetting effects (i.e., RC drove
unit costs up, while denominator volume based on
theoretical capacity drove unit costs down).

Pre-RCA Issues:
Costs changed for individual products based on unrelated changes to other products.
Products that were manufactured on newer (but
equally or more capable) machines often received
greater cost allocations even if the products were very
similar.

Cost assignment based on theoretical capacity resulted in assigning only the cost of resources used to
consuming objects.

RCA Benefits:
Managers lowered selling prices (nonstrategically) to
increase volume in an effort to decrease allocated
cost per unit to make the product more profitable on
a per-unit basis.

Properly attributing costs to specific production

processes and their outputs resulted in more accurate
cost assignment and a better understanding of
resource consumption patterns.

Resource planning was impeded by the inability

to simulate relevant cost results given the current
system.

The achievement of more accurate cost assignment

provided the ability to conduct resource planning
using only relevant costs.

RCA Features:
The use of replacement cost depreciation eliminated
the issue of unequal cost assignment for similar products that consumed similar resources and support
activities.

RCA cost assignment featured a mix of activity-based

and direct assignment based on resource consumption.
RCA cost assignment excluded fixed costs that could
not be traced based on causality.

Product costs included only the cost of resources

used.

RCA changes included using replacement cost (RC)

depreciation to generate internal cost decision-support information.

The amount of excess/idle capacity was made visible

to managers based on unconsumed theoretical
capacity.

RCA changes included the use of theoretical capacity

as a basis for cost assignment.

Cost assignment based only on causality eliminated

costs that were previously assigned based on unrelated changes to other products.

RCA Results:
The largest difference noticed between the preand post-RCA systems was due to the differing costassignment logic.

The incentive to nonstrategically lower selling prices

to artificially manipulate cost allocation amounts to
specific products was eliminated.

The cost-assignment logic element that accounted for

the largest pre- and post-RCA results difference was
the recognition of causal relations between support
department costs and their consuming objects.

Properly identifying resource consumption based on

the innate nature of particular costs enhanced managers ability to understand resource interrelationships
and use the underlying information to support incremental decision making.

RCA identified a greater amount of proportional cost

relationships that the prior system treated as fixed.

M A N A G E M E N T A C C O U N T I N G Q U A R T E R LY

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FALL 2004, VOL. 6, NO. 1

using RCA, we find that, for one of the machines, fixed

costs tend to be higher (i.e., depreciation, fixed maintenance, and square footage), composing 91% of total cost
assigned. On the other machine, proportional costs tend
to be higher (i.e., proportional maintenance), while
fixed costs make up only 77% of total cost assigned. Per
the CSC, both machines have the same cost rate per
hour of $200.99. Under MB RCA, the two machines
have very different cost rates per hour of $106.98 and
$217.76. Similar results are attained with RC RCA,
which produces cost per hour of $90.81 and $165.38.
The difference in type of cost with the two machines
demonstrates the importance of considering information
that is only attainable by examining information at the
resource level.
Differentiating between fixed and proportional costs
is important to all break-even calculations and to all
operating leverage decisions (i.e., involving trade-offs
between proportional and fixed costs) that ultimately
affect the organization. One of the advantages of RCA
(as well as one of the requirements of the Cost Volume
Profit model) is the ability to differentiate proportional
and fixed costs.6 In the example of the two machines,
the CSC does not provide the ability to make this differentiation. At this point (i.e., the point at which the
cost is assumed to provide valid support for decision
making), the existence of reliable underlying system
information becomes important.
Decision makers are limited by the reliability of the
underlying system in generating relevant and accurate
cost information and would welcome information that
helps them understand the potentially different costs
rightfully attributable to two similar machines performing the same activity. We have already shown that the
CSC does not consider these cost differences. It is likely that an ABC system alone would not consider them
either. The only way for this cost information to be reliable is to consider costs at the resource level. The only
way for decision makers to benefit from this resourcelevel consideration is to ensure that the cost information
is integrated into the underlying system. RCA makes
this possible.
LETS REVIEW

THE

Features, Results, and Demonstrated Benefits highlights many of the outcomes of the Clopay case. Some
of these items deserve further discussion here, and
reflecting on the RCA application may help us to form
conclusions. When compared with Clopays traditional
standard costing system, RCA provides significantly
more reliable cost information to support decision making. This is evident in several areas.
We noted that the primary cause for the differences
in cost information between the systems was due to differences in cost-assignment logic. The CSC costs were
almost always higher than RCA, but contribution margins were almost always lower than RCA. This result
happens because of the increased effort of RCA to more
accurately identify and assign variable (i.e., proportional) costs and fixed costs based on quantifiable relationships among resources and the causal relationships
involved. Consequently, RCA considered more costs to
be variable and did not attribute fixed costs to products
in cases where no causal relationships were evident.
From the data evidence presented earlier, we conclude
that RCAs treatment of proportional and fixed cost
translates to increased accuracy in product cost assignment. Moreover, increased cost accuracy provides managers a better understanding of resource consumption
patterns.
Data was not available on some RCA principles
applied, but, through conversation and other reports, we
concluded that managers appeared to benefit from
RCA. For example, because fixed costs are based on
theoretical capacity, the difference between theoretical
and actual consumption of resources was quantified and
made available to managers, which meant that this
excess/idle capacity potentially could be managed to
increase efficiency. Also, as fixed cost treatment was
based only on causality, costs that previously were
assigned based on unrelated changes to other products
were eliminated, which also eliminated the incentive to
nonstrategically lower selling prices to artificially
manipulate cost allocation.
The Clopay case demonstrated the importance of
capturing resource-level information and showed that
product cost results can differ substantially with
resource-level considerations. RCA case data showed
the ability to significantly differentiate costs for prod-

MAIN POINTS

The sidebar titled Pre-RCA Issues and Post-RCA

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FALL 2004, VOL. 6, NO. 1

ucts at this level, which causes us to conclude that

resource-level considerations are important to decisions
that rely on the underlying cost data generated from a
companys system. Although we did not elaborate on
the planning function, it also is important. Managers
must understand that resource planning will be impeded without the ability to simulate relevant cost results.
We believe RCA provides increased relevance in cost
simulations and performance measurement.
Sally A. Webber, Ph.D., CPA, is Household International
Professor in the Department of Accountancy at Northern
Illinois University in DeKalb, Ill. You can reach her at
(815) 753-6212 or swebber@niu.edu.
B. Douglas Clinton, Ph.D., CPA, is an associate professor
in the Department of Accountancy at Northern Illinois University. You can reach him at (815) 753-6804 or
clinton@niu.edu.
1

The use of theoretical capacity in the establishment of costassignment rates for fixed costs is an integral part of RCA, but,
given its uniqueness in U.S. cost-assignment application, its
effects are illustrated separately in this study.
2 The term variable is intentionally avoided with RCA because
the term is usually associated with the final cost object (usually
the product). Instead, the term proportional is intended to
mean that a cost is variable specifically with regard to the output of the resource pool, not necessarily to the final cost
object.
3 David E. Keys and Anton Van der Merwe, German vs. U.S.
Cost Management, Management Accounting Quarterly, Fall
1999.
4 Here the term output is used to refer to the item that is consuming the resource at the object level. That is, the output is
not necessarily implied to be a product, but it can be another
resource pool or an activity.
5 The machines discussed here cannot likely be used interchangeably due to size of cut required. Likewise, extrusion
lines come in various sizes and capacities and can rarely be
used interchangeably. Furthermore, customers are only willing
to qualify their products on certain extrusion lines. All
processes involved, however, are quite similar and would be
expected to produce similar cost-assignment results using only
a process-oriented system such as ABC or a system that does
not consider the resource level for cost assignment.
6 We often use the term proportional rather than variable to
indicate variability with respect to the resource object output
where this might otherwise be confused with variability with
respect to the ultimate cost object. In this context, the two
terms are likely interchangeable.

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