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) and, 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 their capabilities.
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) Task Force.
Brief history 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 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 2012).
Historical timeline 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 History of Accounting Journal in 1976.
1923 – John Maurice Clark. Studies in the Economics of Overhead Costs. Management 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 avoidability.
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 financial accounting: 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 materials, 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 Epistemology of 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 information.
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 practice.
Importance and objectives