RCA Open Source Application: ROSA Manual/RCA Modeling/Cost Objects in the ROSA Model

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Cost Objects in an RCA Model

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Cost Centers

In an RCA model, a cost center delineates a department and represents individual areas of responsibility. A typical large entity RCA Model will have many cost centers. Each cost center can have one or more resource pools depending on the diversity of its resources and outputs. However, in the ROSA model, the term Cost Center is not used so the cost center layer is not modeled; only the Resource Pool layer is modeled. Resource Pools will therefore reflect all provider/consumer relationships.

Resource Pools

Resource Pool

A Resource Pool measures the output of a homogenous set of resources and collects information on the inputs (and their costs) required to produce the resources’ particular output. In an RCA model, resource pools are used to charge costs based on their resource output quantities consumed.

In ROSA, the following consumption relationships are modeled. A particular Resource Pool’s output quantity is consumed by other resource pools in a Resource Pool-to-Resource Pool relationship, consumed by a business process cost object, or consumed directly by a final product or services cost object.

Resource pool rates are classified as fixed and proportional calculated and used for these cost assignments. In RCA, the fixed rate is equal to the total fixed cost for a resource pool divided by the resource pool’s total capacity. The proportional cost rate is obtained by dividing the resource pool’s total proportional cost by its planned output quantity. For more examples on how rates are calculated in ROSA, refer to page 32 of this manual.

Figure 1 - Support Cost example

Resource Pool Support Cost Example:
As illustrated in Figure 1 - Support Cost example, Resource Pool 6101: Utilities- with its output measure (Kilowatt Hours) - is consumed by Resource Pool 7002: Production 1 and Resource Pool 8002: Production 2. In other words, Utilities provides internal support services to keep Production 1 and Production 2 machines operating at their respective production levels. The Utilities Resource Pool provides services to several other resource pools as well (not just the two illustrated in Figure 1 below). Therefore, any resource pool’s output becomes secondary costs for any number of consuming resource pools. Costs that result from such internal consumption of resources are called secondary costs (see below for more details).

Excess/Idle Capacity Example:

Figure 2 - Excess/Idle Capacity example

In Figure 2, Resource Pool 7002: Production 1 has a Binding Machine with Machine Hour output cost rates of $50 fixed and $100 proportional. The Binding Machine has total planned output of 11,280 machine hours, but can actually produce 12,000 machine hours at full capacity. Resource Pool 8002: Production 2 uses 5,000 hours of 7002's Binding machine hours that reflects secondary costs as follows, (1) $250,000 fixed dollars (5,000hrs x $50 fixed rate)and (2) $500,000 proportional dollars (5,000hrs x $100 prop. rate). The remaining 6,280 output hours for Resource Pool 7002 Binding Machine is consumed by other resource pools, as shown in Figure 2 below (6,280hrs x $50 fixed rate = $314,000 fixed costs and 6,280 hrs x $100 prop.= $628,000 of proportional costs).

Direct output consumption in a Resource Pool-to-Resource Pool assignment is the most common approach to building an RCA model. Excess capacity is always identified to avoid arbitrary and therefore, distorting allocations, which can lead to incorrect decision making.

Primary and Secondary Costs:
The Primary costs of a resource pool are the costs of the resources within the resource pool or the cost of inputs procured externally and consumed directly in producing the particular output. An example (refer Figure 3) of a primary cost would be Resource Pool 6101: Utilities, where the electricity (Kilowatt-hours) would be purchased from an outside energy supplier and consumed directly by Utilities. Other primary costs could be for staff that manages the power distribution.

Figure 3 - Primary and Secondary Cost example

Secondary costs of a resource pool result from consuming an output from another resource pool or business process. An example (refer Figure 3) of a secondary cost using Resource Pool 6101: Utilities with the Electricity Resource Pool is when the electricity kilowatt hours are consumed by various Production and Distribution departments within the organization. In effect, the Production and Distribution resource pools are purchasing their kilowatt-hours from their internal electricity provider (Resource Pool 6101: Utilities).

Fixed and Proportional Consumption and Costs:
In addition to primary and secondary classification of costs, RCA models all resource consumption and the associated costs as fixed and/or proportional. A fixed consumption relationship exists when the quantity of the input consumed does not vary with the output level of the consuming cost object; therefore, the cost of that input is fixed. A proportional consumption relationship exists when the quantity of the input consumed changes with the level of output of the consuming cost object.

An example of a fixed cost is Depreciation on a machine in a resource pool, since it does not fluctuate with the machine’s level of output. Refer to Figure 5 for a tabular view of fixed and proportional costs showing a Depreciation cost of $833.33 fixed.

An example of a proportional cost is the cost of electricity for a machine. Any kilowatt-hours (kWh) consumed by the machine will be directly proportional to machine usage. Assume that a machine in Resource Pool 7002: Production 1 (see Figure 3) consumes 50,000 kWh in electricity proportionally from the Utilities Resource Pool 6101. That means the 50,000(kWh) quantity consumed by the machine will fluctuate if production levels either increase or decrease.

Business Processes

Business Process

Business Processes provides analytical insight into resource outputs, such as a particular task within the organization. They are reflective of activities in Activity-based Costing. Activities or Business Processes are used with circumspection in an RCA model. This is because they add another layer of complexity to the cost model when compared to the traditional practice of directly charging the output where it is consumed.

Business processes are used when it is a cost effective way to capture a resource pool’s output compared to tracking discrete resource quantities. This may be the case when dealing with many salaried support areas (e.g. Human Resources, Procurement, or IT departments). Use of a business process with a production resource pool should be limited to where their use provides the required analytical insight into the resources’ output.

Business processes are only used between a providing resource pool and a consuming resource pool or a providing resource pool and a product/service/final cost object.

Figure 4 - Production with Business Process example

In RCA, Business processes are not modeled as supporting other business processes. The ability to trace resource quantities and capacities would be lost violating the fundamental principle of maintaining clearly traceable and responsive quantity-based cause and effect relationships.

Business Process Support example:
The HR department may have two primary business processes, which a small staff provides: Process 1) Payroll & Benefit transactions and Process 2) Recruit & Hire personnel. If a 2 or 3 person HR department is engaged in both these activities then it may not make sense to break the HR department into separate resource pools, but rather to assign HR services (and their costs) to the consuming resource pools based on the type and number of transactions for each business process.

Business Process Production example:
In the production area (i.e., Resource Pool 7002) might produce two types of products that require different settings – a narrow setting and a wide setting – on the Binding machine. As the manager begins to implement a pull-based production approach and smaller batches for the two products, the amount of set-up time becomes more critical. The manager can use business process functionality to track the associated costs pertaining to: (1) Labor hours and machine time spent producing the product and, (2) Labor hours and machine time engaged in machine set-up (see Figure 4). When set-up time improves and becomes a standard metric or insignificant, this department could then stop tracking business process information.

Product/Service/Project Objects

Product/Service/Project Cost Object

Cost objects such as Product Objects, Service Objects or Project Objects collect primary (e.g., raw material for a product) and secondary (e.g., conversion labor) costs for an organization’s products and services.

In ROSA, reports are possible for all the cost objects mentioned above using the ROSA product cost object. These reports can be structured in different ways to present “planned” values for Primary cost and “planned” Secondary consumption in quantity and values. In unit 4, several examples of ROSA reports are shown including Figure 22 - Analyze Products report

In Figure 23 - Analyze Resource Pools and Business Process report shows how the costs are incurred on a cost object and reflects Primary and Secondary costs by element in the rows. Primary elements reflect the GL account number and Secondary elements reflect the resource pool or business process where the secondary costs are coming from.

The first three numeric columns in Figure 23 show the Dollar values (Total, Fixed and Proportional). The last three columns in Figure 23 show the quantities consumed, as Total Quantity, Fixed and Proportional Quantities. Note that quantities are only shown against secondary cost elements.

In this same report, it also shows how costs are recovered or how they are charged out to the consumers for the cost object’s services. Note, in this example costs are recovered to resource pools, business processes and to products. The very bottom row, titled “Over / Under Recovery” shows the difference, or the net result, of cost and recovery. As this model only deals with “planning” (budgeting), you should not have an Over Recovery. If there is excess capacity in the resource pool, you should see an Under Recovery here.