Management accounting principles (MAP) were developed to serve the
core needs of internal management to improve decision support
objectives, internal business processes, resource application,
customer value, and capacity utilization needed to achieve corporate
goals in an optimal manner. Another term often used for management
accounting principles for these purposes is managerial costing
principles. The two management accounting principles are:
Principle of Causality (i.e., the need for cause and effect insights)
Principle of Analogy (i.e., the application of causal insights by
management in their activities).
These two principles serve the management accounting community and its
customers – the management of businesses. The above principles are
incorporated into the Managerial Costing Conceptual Framework (MCCF)
along with concepts and constraints to help govern the management
accounting practice. The framework ends decades of confusion
surrounding management accounting approaches, tools and techniques and
The framework of principles, concepts, and constraints will drive the
classification of management accounting practices in the profession to
"enable a better understanding both inside the profession and outside,
of the compromises that result from inappropriate principles".
Without foundational principles, managers and accounting professionals
have no consistent footing on which to challenge or evaluate new
theories of methods for managerial costing.
Some management accounting methods are designed primarily to serve and
comply with financial accountancy guidelines. The importance of having
distinct and separate principles exclusively for Management Accounting
has received support and acknowledgement after almost a century of
work on the topic. The idea that separate management accounting
principles exist for managerial decision support distinct from
financial reporting needs is now recognized by professional accounting
bodies such as the International Federation of Accountants
Professional Accountants In Business Committee and the Institute of
Management Accountants Managerial Costing Conceptual Framework (MCCF)
1 Brief History
2 Historical timeline
3 Importance and objectives
4 Truth as the foundation
5 Not GAAP
6 Concepts and Constraints
7 See also
9 External links
Prior to 1929 no group – public or private – was issuing or
responsible for any accounting standards. After the 1929 stock
market crash, a call to regain the public's confidence and investor's
trust was demanded and the
Securities and Exchange Act of 1934
Securities and Exchange Act of 1934 was
passed resulting in public companies being supervised by the U.S.
Securities and Exchange Commission (SEC). This set the groundwork for
GAAP Generally Accepted
Accounting Principles (United States),
outlining financial accounting principles for external reporting
standards for users of financial statements' information such as
capital markets and creditors.
Over the next 47 years many individual committees, professional bodies
and boards released various financial accounting procedural frameworks
until 1976 when work began on a US framework that remains in place
today, governed by the Financial
Accounting Standards Board (FASB).
Note: Since April 1, 2001 the International
Accounting Standards Board
has been working on developing new international financial reporting
standards. The new standards, referred to as International Financial
Reporting Standards (IFRS), aim to update and refine existing concepts
and provide descriptive guidance that includes comparisons of
reporting requirements between IFRS and U.S. GAAP. As a result of
establishing International Financial Reporting Standards, the IASB and
FASB Conceptual Frameworks and Standards are in the process of being
updated and converged to reflect the changes in markets, business
practices and the economic environment that have occurred in the two
or more decades since the concepts were first developed. One of the
foundations of a set of Financial
Accounting Standards is the creation
of a Conceptual Framework that defines the principles upon which the
standards will be based. Most major national and international
accounting standards have developed conceptual frameworks to support
their work on setting standards.
In contrast, management accounting principles have been overlooked
from both a conceptual and a standards point of view and, for the most
part, overshadowed by financial accounting standards. Generally
accepted accounting principles applies strictly to financial
accounting because it was either the only guidance they had at the
time, or did not know what else to do.
Until recently, no serious work has been done by the accounting
profession on the conceptual differences between the use of management
accounting techniques to support GAAP financial reporting and
management accounting techniques used for internal decision support.
This greatly compromises the management accounting practice and the
ability of management accountants to provide managers with relevant
decision support and optimization information. Yet, several innovative
thinkers, shown in the Timeline below, saw value in management
accounting having its own distinct set of principles. Over the last
century it is more and more evident that management accounting
principles be viewed as "indispensable to the evaluation and
improvement of MA methods and practices" (Clinton, Van der Merwe
1910 – Church. The History of Accounting. The management accounting
practice was originally discussed in a series of articles published in
The Engineering Magazine. As was typical of early management
accounting practice after the industrial revolution, it was a topic of
interest to engineers. Church discussed practices that conveyed the
management accounting principles of causality and analogy but never
formally defined them. The content of this series was reprinted in The
Accounting Journal in 1976.
1923 – John Maurice Clark. Studies in the Economics of Overhead
Accounting theory developed and was embedded in his
cost allocation discussion; Clark stressed the need to consider causes
and their effects. He was also the first to delineate operational cost
concepts from decision cost concepts having introduced the concept of
1936 to 1954 – Committee on Cost
Accounting Concepts and Standards
(CACS). Operating under the direction of the American Accounting
Association, CACS had determined to develop accounting principles and
standards for all fields of accounting.
1954 – Benninger. The
Accounting Review. "The principles accepted
would not need to be restrictive, except in the sense that any proper
practice restricts departure from it. They should deal more with
fundamental methods of expressing accounting facts than with the
extent of "disclosures" in published statements."  and "… the
cost accountant could be more effective the further his basic data
were from the general ledger." 
1979 – Shillinglaw. Cost
Accounting Principles for External
Reporting: A Conceptual Framework. "A body of concepts, principles,
and practices has evolved over the years, gradually becoming what
might be referred to as generally accepted cost accounting principles
(1979, 157-158)."  (Note: Shillinglaw's proposed principles were
only considered for the select area of Cost
Accounting – one
offshoot of management accounting to serve external financial
accounting specifically. His framework's stated intent was not to
cater for Management
Accounting per se but it nevertheless argued for
causality as a principle.)
1983 – Choudhury.
Accounting and Business Research. In discussing
the confusion surrounding the lack of common and meaningful management
accounting terminology says, "… we are no nearer to being provided
with a coherent theory of, if you like, a conceptual framework for
management accounting."  Choudhury did not; however, propose a
management accounting conceptual framework.
2002 – Richardson.
Accounting Historians Journal. Alan Richardson
documents five reasons why managerial accounting has been dominated by
the use of financial accounting criteria to judge the quality of
management accounting systems,
the assignment of management accountants to subordinate positions in
organizational units whose primary purpose was financial accounting,
the dominance of financial accounting in the market for educational
the judgment of the labor market that a financial accountant could
replace a management accountant (but not vice versa) and,
the need for a young profession to gain and retain the support of
established interests in society.
2005 - International Federation of Accountants, Professional
Accountants in Business Committee. Information Paper: The Roles And
Domain of the Professional
Accountant in Business. Under the Standards
and Guidance section it states, "The purpose of principles-based good
practice guidance is to encourage effective and efficient
decision-making and the adoption of tools and techniques that can be
applied intelligently within different types of organizations.
Principles-based good practice guidance focuses on performance by
addressing the value-creating processes and procedures that support
robust business outcomes and successful organizations." 
2007 – Van der Merwe. Cost Management Journal. The Management
Accounting Philosophy series of articles. This series relied heavily
on Shillinglaw's work with one exception. It added a philosophical
foundation by using the basic
Deductive reasoning and
Inductive reasoning and two of the four laws of logic to show that
management accounting's two principles are causality and analogy and
that they are rooted in a bedrock of truth.
2009 – International Federation of Accountants, Professional
Accountants in Business Committee. International Good Practice
Guidance: Evaluation and Improving Costing in Organizations. The
principles as proposed in the Management
Accounting Philosophy series
(referenced above; 2007) were adopted in IFAC's International Good
Practice Guidance (IGPG).
2009 – International Federation of Accountants, Professional
Accountants in Business Committee. Information Paper: Evaluating the
Costing Journey: A Costing Levels Continuum Maturity Model. The
maturity model was published as supplementary to the principles-based
IGPG (referenced above) to allow companies to assess where they were
on the proposed costing continuum as far as their management
accounting maturity is concerned. Resource Consumption Accounting
(RCA) was found to be the most advanced method available today.
2011 – Institute of Management Accountants. Strategic Finance
Journal. In the October 2011 issue, an article titled Why We Need a
Conceptual Framework for Managerial Costing provides a brief overview
of the reasons why management accounting needs its own framework
distinctly separate for internal managers.
2012 – Institute of Management Accountants, Managerial Costing
Conceptual Framework Task Force. Conceptual Framework for Managerial
Costing. An Exposure Draft was released July 2012 for public comment
and is the most extensive and thorough guidance available to
management accounting practitioners and users of management accounting
2014 – Chartered Institute of Management Accountants, American
Institute of Certified Public Accountants. Global Management
Accounting Principles (GMAPs). Two of the world's foremost accountancy
bodies combined to create a new set of principles to guide best
Importance and objectives
Management accounting for use inside an organization must reflect the
reality of the operations and resources used by the organization in
monetary terms. Unlike financial reporting, where the objective
focuses on external investors and creditors seek to compare investment
options across the capital markets, management accounting focuses on
the economic choices and constraints within an organization. There are
two interrelated parts in understanding why management accounting
principles are so important and how these principles help managers
achieve their primary objective: enterprise optimization.
The first principal part deals with the actual modeling of a company's
operations, where the management accountant establishes and builds
causal relationships based on the principle of causality and related
management accounting concepts. Part two involves the principle of
analogy and the manager's analytical needs for decision support
information provided by part one (its cause-and-effect relationships).
Part two requires analyzing the information in light of one or more
decision alternatives so that the decision maker(s) can reach the
optimum decision. The cumulative application of both principles
(causality and analogy) achieves management accounting's objectives
and fulfills the managers' needs – the optimization of the company's
operations, generally referred to as enterprise optimization.
First objective - managerial costing is:
To provide a monetary reflection of the provision and utilization of
business resources and,
To provide cause and effect insights into past, present, or future
enterprise economic activities.
Second objective – managerial costing aids managers:
In their planning, analysis, and decision making and,
Supports optimizing the achievement of an enterprise's strategic
At a more granular level the consistent application of management
accounting's principles hold a number of benefits for an organization.
Provide managers and employees with an accurate, objective cost model
of the organization and cost information that reflects the use of the
Present decision support information in a flexible mold that caters to
the timeline and insights needed for internal decision makers.
Provide decision makers insight into the marginal/incremental aspects
of the alternatives they are considering.
Model quantitative cause and effect linkages between outputs and the
inputs required to produce and deliver final outputs.
Accurately values all operations (support and production) of an entity
(i.e. the supply and consumption of resources) in monetary terms.
Provides information that aids in immediate and future economic
decision making for optimization, growth, and/or attainment of
enterprise strategic objectives.
Provides information to evaluate performance and learn from results.
Provides the basis and baseline factors for exploratory and predictive
Truth as the foundation
It is managerial accountants' job to provide correct information to
all internal managers. In other words, the costing information
gathered must be factual and truthful, as in 'what is the cost that
reflects the actual use of the resources and processes'. Therefore,
truth corresponds to facts and when applied to Management Accounting
it translates to resources in operation creates a factual situation.
Obviously, the resources and operations about which a manager makes
decisions on are based on factual information. The manager's decision
will act to change the current situation since the manager is
interested in the economic impact of the possible outcomes.
Philip Lawton, investment professional and co-author of The Top Ten
Operational Risks: A Survival Guide for Investment Management Firms
and Hedge Funds writes
"Managerial costing is not to be confused with cost accounting. The
latter (cost accounting) applies financial reporting conventions to
inventory valuation, transfer pricing, and the cost of goods and
services sold, and it serves the informational requirements of
external parties, including investors, creditors, regulators, and tax
authorities. Managerial costing is intended for internal use; it
supports the decisions that managers make to optimize operations. The
authors observe, "The stock market clearly does not value a company
for excellently prepared financial statements if operational
excellence is lacking." Moreover, in order to capture outputs and
their required inputs, well-executed managerial costing uses data
drawn from operational and logistical systems rather than general
ledger accounts. In this way, operational quantities and costs are
tied to the organization's internal value chain."
Correspondence theory of truth was originally defined by
Aristotle; however, a simpler and more up-to-date definition is: "A
statement or opinion is true if what it corresponds to is a fact."
The correspondence definition of truth forms the foundational building
blocks for management accounting's principles. In this regard, the
foundation of MAP is grounded in the laws of logic and structured
reasoning outlined and discussed at length in the Management
Accounting Philosophy series published in Cost Management. The
recognition of truth as the basis for management accounting goes back
a long way.
"It is very important that costs should not be regarded as something
that may be manipulated, nor should they be thought of as representing
anything but the cold truth, however unwelcome that may be."
— Church, 1910
This emphasis on truth should not be confused with precision; it
should be clear that costing methods are disputable, while principles
are not. Principles support managers who are required to make
inferences about future outcomes of all the decision alternatives they
are considering based on cause and effect insights. The use of
principles enables managers to deal with causes and their effects in
different time frames. This is not to say that management accounting
is a science, it is not. But
Decision science —that which management
accounting supports, with the information it provides — is a
science: 119. Missing or empty title= (help)
"In order to provide a sound basis for decisions, cost measurements
should, in so far as possible, reflect the truth".
— Benninger, 1954
The growth of management accounting and its practices as outlined in
Accounting – Approaches, Techniques and Management
Processes, mentions that management accountants remain dissatisfied
with the quality of their management accounting information in the
absence of guiding principles. This disconnect is clearly documented
in research such as the 2003 Survey of Management Accounting by
Ernst & Young LLP; co-sponsored by IMA and the follow up survey
2012 Alta Via, SAP, and IMA Management
Accounting Survey: A
Replication and Longitudinal Comparison. Confusion and frustration
took hold of the MA profession partly because accountants were trying
to satisfy two very different goals with one information system; the
compliance needs of financial reporting (GAAP) alongside managerial
costing decision analysis needs. In addition, controllers,
accountants, and managers who were seeking to improve operations or
resolve internal costing issues discovered that when selecting
different costing methods, each one subscribes to assorted allocation
techniques and produces very different results. And finally, the lack
of a conceptual framework and foundational principles that previously
did not exist in order to do costing for internal decision support.
Contradicting theories and practices do not instill trust or truth
towards the optimization of an entity. Foundational principles are
intended to drive the classification of approaches, tools, and
processes, thereby providing a way for accountants and managers to
evaluate the tools and approaches they may be considering for the
decision or costing tasks at hand. The principles function as a way of
better understanding the risks and compromises associated with a
practice or method when it strays from the principles of causality and
Companies need to identify the economic reality of their organization
based on resources and operations, not reflect dollar values
calculated using accrual-based accounting methods that conform to
Accounting Principles (United States). Accountants
may argue that financial accounting principles represent true values
and are more than sufficient for management accounting purposes.
Maximizing financial statement results is a primary objective;
however, focusing only on accounting numbers or common financial
ratios can lead to bad behavior versus focusing on operations and
resource use for long term sustainable economic success. By examining
two of the four financial accounting principles, it will reveal that
financial accounting principles (e.g., Historical cost, Revenue
recognition, Matching principle, and Full Disclosure) do not serve the
objectives of management accounting. Let's examine the following two
Historical cost principle (Kieso, Weygandt and Warfield)p38 – the
only time this principle reflects cost is at the initial time of
purchase or acquisition. In subsequent periods, the historical cost
along with taxation-driven depreciation methods does not help managers
determine their current operational cost factors.
Matching principle (Kieso, Weygandt and Warfield)p40 – this
principle mandates that the costs (expenses) must follow revenues or
adopt the best "rational and systematic" allocation of costs
associated with the benefit, including assumptions about when the
benefit (and therefore costs) are to be received. Clearly, managers
who are required to perform a cost analysis would have no idea under
the matching principle what costs would be included/excluded or be
currently impacting his department.
The two financial accounting principles noted above briefly describes
the chasm that exists between financial accounting and managerial
accounting objectives. Financial accounting's objective is to produce
a coherent set of standards for consistency and comparability
purposes; therefore, providing external parties in the capital
markets, a level playing field for evaluating a company's individual
performance as well as across other competing businesses. Where
Management accounting's objectives exist is to inform internal
managers of the correct choices for long term economic success.
As discussed with Larry R. White, task force member of the Managerial
Costing Conceptual Framework, in CFO.com,
"Manufacturing companies, in particular, often run into problems from
the use of GAAP models for internal costing purposes, White notes.
"We've seen factories where salesmen line up to get their orders run
by the oldest production line in the factory, while there are
brand-new production lines and machines sitting idle that would
produce the order quicker and with better quality. The reason is that
the factory was doing its costing based on a derivation of GAAP
standards. Consequently, the fully depreciated machines didn't have a
depreciation charge associated with them, where the newer machinery
Concepts and Constraints
Diagram of Principles, Concepts, and Constraints specific to the field
Accounting and its internal business users.
Management accountants can rely on causality and analogy as
foundational principles as they are grounded in decision science –
the laws of logic.
Causality principle — the relation between a managerial objective's
quantitative output and the input quantities that must be, or must
have been, consumed if the output is to be achieved.
Principle of Causality enables modeling the organization's costs based
on the relationship between the inputs and outputs of the resources
involved in the production of products and services it provides. Often
this is straightforward when dealing with strong causal relationships
(i.e. raw materials to make product A). However, where weaker causal
relationships exist, costs need to be attributed according to the
concept of attributability, which maintains the integrity of
Analogy principle — the use of causal insights to infer past or
Principle of Analogy governs the user of management accounting
information's ability to apply the knowledge or insights gained from
the causal relationships modeled (e.g., in planning, control, what-if
analysis) using inductive and deductive reasoning about past and
future outcomes for continuous optimization efforts.
The following concepts serve as operational guidelines and modeling
building blocks to the two main principles (causality and analogy) in
developing a reflective cause & effect model and then using the
information the model provides. These concepts are intended to cover a
variety of assumptions that would make up a model, their
characteristics, and relationships and to provide rational
perspectives when modeling many managerial costing issues.
The first ten concepts support the Principle of Causality the modeling
of Cause&Effect-based modeling principles, while the remaining
four concepts are applicable to the Principle of Analogy and
informational in nature and supports managers with decision making
Concepts applicable to causality and modeling:
Integrated data orientation
Concepts applicable to analogy and information use:
The following constraints have been identified for management
accounting. The quantitative and qualitative characteristics of these
constraints are meant to serve as controls or checks and balances when
constructing a cost model or when using management accounting
information. The first five constraints are specific to Causality in
the cost model, while the remaining two constraints deal with Analogy
and the use of the information.
Constraints applicable to causality:
Constraints applicable to analogy information use:
Convention of consistency
Event to knowledge, timeliness of financial information
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^ Managerial Costing Conceptual Framework
International Federation of Accountants
Institute of Management Accountants
Institute of Management Accountants (IMA) Publisher of Strategic
Finance and Management Accounti