Manufacturers are increasingly challenged to justify efficiency improvement investments using financial results. This can be extremely difficult when using traditional costing geared towards financial reporting requirements that doesn’t go to the depth of many operational metrics. This column presents a simple example of the type of information needed to fill common gaps in typical financial accounting information. The illustrated resource consumption accounting model creates a dashboard where production can switch between a plus or minus sign to see the monetary impact of a change in efficiency.
The model is built on detailed information from work centers engaged in production, both direct and support services. Each workstation 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 displays the adjusted plan for volume/output changes. The relevant metric for assessing monetary performance is actual versus target.
Each workstation can be broken down into resource pools using the same approach. In this example, the training workstation resource pools are shown.
The model shows that the resource pool of the extruder is underperforming, i.e. the actual cost is well above the target for the actual output achieved. The table details the individual resources that make up the extruder resource pool. Primary costs are resources from the extruder resource pool, and secondary costs reflect support services consumed by the extruder resource pool. This table also gives an overview of fixed costs and proportional costs, which vary depending on the output of the resource pool. Costs in fixed proportional columns are proportional to their source but fixed at the extruder, in this case: hours spent on preventive maintenance.
The granularity of this type of monetary information, which reflects the quantitative causal operational behavior of resources and their outputs, makes it easy to quantify improvements in the efficiency of manufacturing resources without the distortions created by aggregated overhead using rough estimates of fixed and variable costs or ignoring capacity utilization costs, especially unused/excess capacity. Resource consumption accounting and other advanced costing approaches that adopt the Institute of Management Accountants’ conceptual framework for management costing focus on incorporating causal operational information into their monetary information.