Management Accounting Principles

Applying management accounting principles (MAP) to the core needs of internal management to improve decision support objectives, internal business processes , resource application, customer value, and capacity utilization required to achieve corporate goals in an optimal manner was developed . Another term often used for management accounting principles for these purposes is managerial cost theory. There are two management accounting principles:

  • the theory of causality (i.e., the need for cause-and-effect insights) and,
  • Principle of analogy (i.e., application of causal insights by management in their activities).

These two principles serve the management accounting community and its clients – the management of businesses. The above principles are incorporated into the Managerial Cost Conceptual Framework (MCCF), along with concepts and constraints, to help govern management accounting practice. The framework eliminates decades of confusion [1] surrounding management accounting approaches, tools and techniques and their capabilities.

The Framework of Principles, Concepts and Constraints enables a classification of management accounting practices in the profession “both inside and outside the profession of agreement that result from unreasonable principles” . [2] Without fundamentals, managers and accounting professionals have no consistent basis on which to challenge or evaluate new theories of managerial costing methods. [3]

Some management accounting methods are primarily designed to serve and comply with financial accounting guidelines. The importance of distinct and distinct principles, especially for management accounting, has gained support and acceptance after nearly a century of work on the subject. The idea that separate management accounting principles exist for managerial decision support separate from financial reporting requirements is now recognized by professional accounting bodies such as the International Federation of Accountants , the Professional Accountants in Business Committee and the Institute of Management Accountants ‘ Managerial Costing Conceptual Framework (MCCF) Tasks . Is. force .

brief history

Prior to 1929 no group – public or private – issued or was responsible for any accounting [4] standards. After the stock market crash of 1929, a call was made to regain public confidence and investor confidence, and the Securities and Exchange Act of 1934 was passed, resulting in the US Securities and Exchange Commission overseeing public companies. (SEC) did . This set the groundwork for GAAP Generally Accepted Accounting Principles (United States) , which outline financial accounting principles for information on financial statements such as capital markets and external reporting standards for creditors.

Over the next 47 years a number of individual committees, professional bodies and boards issued various financial accounting procedural frameworks until 1976, when work began on a US framework that is still governed by the Financial Accounting Standards Board (FASB).
Note: Since 1 April 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), are intended to update and refine existing concepts and provide descriptive guidance including a comparison of reporting requirements between IFRS and US GAAP.

As a result of establishing International Financial Reporting Standards, IASB andThe FASB conceptual framework and standards are in the process of being updated and changed to reflect changes in markets, business practices and the economic environment that have occurred over two or more decades. The concepts were developed first. One of the foundations of a set of financial accounting standards is the creation of a conceptual framework that defines the principles on which the standards will be based. Most of the 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 normative point of view, and are, for the most part, overshadowed by financial accounting standards. Generally accepted accounting principles apply strictly to financial accounting because it was the only guidance they had at the time, or did not know what else to do. [5] [6]

Until recently, there has been no serious work on the conceptual distinction between the use of management accounting techniques by the accounting profession to support GAAP financial reporting and the management accounting techniques used for internal decision support. This greatly compromises management accounting practice and the ability of management accountants to provide relevant decision support and optimization information to managers. Nevertheless, many innovative thinkers, shown in the timeline below, saw the value of their own distinct set of principles in management accounting. In the last century it has become more and more clear that management accounting principles can be seen as “indispensable for the evaluation and improvement of MA methods and practices” (Clinton, van der Merwe 2012).

Historical Timeline

1910 – Church. History of Accounting . Management accounting practice was discussed in a series of articles originally published in the journal Engineering. As was typical of early management accounting practice after the Industrial Revolution, it was of interest to engineers. Church discussed practices that draw causality and analogy to management accounting principles but never formally defined them. The contents of this series were reprinted in 1976 in The History of Accounting Journal.

1923 – John Maurice Clark . Studies in the economics of overhead costs . Management accounting theory evolved and was embedded in their cost allocation discussion; Clarke stressed the need to consider causes and their effects. He was also the first to delineate operating cost concepts from decision costing concepts, introducing 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 was determined to develop accounting principles and standards for all areas of accounting.

1954 – Beninger. Account Review . “Accepted principles shall not be required to be restrictive, except in the sense that any reasonable practice prohibits a departure from it. They should be subject to fundamental ways of expressing accounting facts compared to the extent of “disclosure” in published statements. more should be dealt with. and “… the cost accountant may have been more effective because his original data was from the General Ledger.”

1979 – Shillinglaw. Cost accounting principles for external reporting: a conceptual framework . “A set of concepts, principles, and practices have evolved over the years, gradually becoming what may be referred to as generally accepted cost accounting principles (1979, 157–158).”Note: Schillinglaw’s proposed principles were only considered for a select area of ​​cost accounting—specifically a branch of management accounting to serve external financial accounting. The stated intention of his framework was to complement management accounting. was not for, but nevertheless argued for causality as a principle.)

1983 – Chowdhary. Accounting and business research . In discussing the confusion surrounding the lack of common and meaningful management accounting terminology, “…we are no closer to being provided with a coherent theory of a conceptual framework for management accounting.” Choudhury did not; However, a management accounting conceptual framework is proposed.2002 – Richardson. Journal of Accounting Historians . Alan Richardson has documented five reasons why managerial accounting is dominated by financial accounting:

  1. the use of financial accounting criteria to judge the quality of management accounting systems,
  2. Assignment of management accountants to subordinate positions in organizational units whose primary objective was financial accounting,
  3. the dominance of financial accounting in the market for educational materials,
  4. the labor market decides that a financial accountant can replace (but not vice versa) a management accountant and,
  5. The need for a young profession to gain and maintain the support of established interests in society.

2005 – Professional Accountants in the International Federation of Accountants , Business Committee. Information Sheets: Roles and Domains of Professional Accountants in Business . Under the Standards and Guidance section it says, “Principles-based good practice guidance aims to encourage effective and efficient decision-making and the adoption of tools and techniques that can be applied intelligently within a variety of organizations.” -based good practice guidance focuses on performance by addressing value-creation processes and processes that support strong business outcomes and successful organizations.” [14]

2007 – Van der Merwe. Cost Management Journal . Management Accounting Philosophy Series of Articles. The series relied heavily on the work of Schillinglaw, with one exception. It added a philosophical foundation by using basic epistemological deductive reasoning and inductive reasoning to show that the two principles of management accounting are causation and analogy and that they are rooted in a premise of truth and two of the four laws of logic.

2009 – Professional Accountants in the International Federation of Accountants , Business Committee. International Good Practice Guidance: Cost Evaluation and Improvement in Organizations . The principles proposed in the Management Accounting Philosophy Series (referenced above; 2007) were adopted in IFAC’s International Good Practice Guidance (IGPG).

2009 – Professional Accountants in the International Federation of Accountants, Business Committee. Information sheet: Evaluation of cost travel: A cost level continuum maturity model . The Maturity Model was published as a supplement to the Principles-Based IGPG (referenced above) to allow companies to assess where they were on a proposed cost continuum as far as their management accounting maturity is concerned. . Resource Consumption Accounting (RCA) was found to be the most advanced method available today. [19]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 separate framework for internal managers. [2]2012 – Institute of Management Accountants, Managerial Cost Conceptual Framework Task Force. Conceptual framework for managerial costing . An Exposure Draft was released for public comment in July 2012 and is the most comprehensive and complete guidance available to management accounting practitioners and users of management accounting information. [3]2014 – Chartered Institute of Management Accountants, American Institute of Certified Public Accountants. Global Management Accounting Principles (GMAP) . The two most prominent accounting bodies in the world combined to create a new set of principles to guide best practice. [20]

Importance and Purpose

Management accounting for use within an organization must reflect the actuality of operations and resources used by the organization in monetary terms. Unlike financial reporting, where the objective is focused on external investors and creditors seek to compare investment options in the capital market, management accounting focuses on economic choices and constraints within an organization. There are two interrelated parts to understanding why management accounting principles are so important and how these principles help managers achieve their primary objective: enterprise optimization.

The first major part deals with the actual modeling of company operations, where the management accountant establishes and builds causal relationships based on the principle of causality and related management accounting concepts Part two covers the principle of analogy and the manager’s analytical needs for the decision support information provided by Part One (its cause-and-effect relationship). Part two requires analyzing the information in the light of one or more decision options so that the decision maker(s) [21]reach the optimum decision. The cumulative application of both principles (reason and analogy) achieves the objectives of management accounting and meets the needs of managers – optimizing company operations, commonly known as enterprise optimization.

The first objective – managerial costing is:

  • providing a monetary reflection of the provision and use of business resources and,
  • Providing cause and effect insight into past, present or future enterprise economic activities.

Second Objective – Managerial Cost Support Manager:

  • in their planning, analysis and decision making and,
  • Supports optimization of the achievement of strategic objectives of the enterprise.

The consistent application of management accounting principles at a more nuanced level has many benefits for an organization.

  • Provide managers and employees with an accurate, objective cost model of the organization and cost information that reflects the organization’s use of resources.
  • Present decision support information in a flexible mold that meets the timeline and insight needed for internal decision makers.
  • Provide decision makers with insight into the marginal/incremental aspects of the options they are considering.
  • Model quantitative cause-and-effect relationships between outputs and inputs required to produce and distribute the final output.
  • Precisely values ​​all the functions (support and production) of a unit (i.e. supply and consumption of resources) in monetary terms.
  • Provides information that assists in making immediate and future economic decisions to optimize, develop and/or achieve the strategic objectives of the enterprise.
  • Provides information to evaluate performance and learn from the results.
  • Provides the basis and foundational factors for exploratory and predictive managerial activities

Truth as a Foundation

It is the job of managerial accountants to provide accurate information to all internal managers. In other words, the cost information collected should be factual and true, such as ‘what is the cost that reflects the actual use of resources and processes’. Therefore, truth corresponds to facts and when applied to management accounting it translates into resources in operations, creating a factual position. Obviously, the resources and operations about which a manager makes decisions are based on factual information. The manager’s decision will act to change the current situation as the manager is interested in the economic impact of the possible outcomes.

Philipp Lawton, investment professional and co-author of The Top Ten Operational Risk: A Survival Guide for Investment Management Firms and Hedge Funds [22] writes.Operating volume and cost are linked to the intrinsic value of the organization. Chain.”[23]

The 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 that which corresponds to a fact.” [24] The correspondence definition of truth forms the foundational building block for the principles of management accounting. In this respect, the foundation of MAP is based on the rules of logic and structured reasoning outlined in the Management Accounting Philosophy Series published in Cost Management. [15] The recognition of truth as the basis of management accounting is very old.

This emphasis on truth should not be confused with accuracy; It should be clear that costing methods are disputed, while theories are not. Theories favor managers who need to make predictions about the future consequences of all the decision options 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—the one that supports management accounting, the one that provides information—is a science [3] : 119. missing or empty |title=(help)

“To provide a sound basis for decisions, cost measurements should, as far as possible, reflect the truth”.-  Benninger, 1954

Growth of Management Accounting and Its Practices As outlined in Management Accounting – Approaches, Techniques and Management Processes , [1] noted 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 [25] by Ernst & Young LLP ; IMA Co-Sponsored and Follow-up Survey 2012 Alta Via, SAP, and IMA Management Accounting Survey: A Replication and Longitudinal Comparison . [26]Confusion and frustration took over the MA profession partly because accountants were trying to accomplish two very different goals with one information system; Managerial cost decision analysis requirements as well as compliance requirements of financial reporting (GAAP). In addition, controllers, accountants and managers who wanted to improve operations or resolve internal costing issues found that when choosing different costing methods, each subscribed to mixed allocation techniques and resulted in very different results. generates. And finally, the lack of a conceptual framework and fundamentals that previously did not exist to make up for the costs for internal decision support.


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 follow generally accepted accounting principles (United States). are in line with. 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 general financial ratios can lead to poor practice versus focusing on the use of resources for operations and long-term sustainable economic success. 

By examining two of the four financial accounting principles, it would appear that the financial accounting principles (e.g., historical cost, revenue recognition,do not . Let’s examine the following two GAAP principles:a) Historical cost theory (Kieso, Weygandt and Warfield)p38 – This theory reflects the cost only at the initial time of purchase or acquisition . In later periods, historical cost with taxation-driven depreciation methods does not help managers determine their current operating cost factors.b) The matching principle (Kieso, Weygandt and Warfield)p40 – this principle mandates that costs (expenses) must follow revenue or adopt the best “rational and systematic” allocation of costs associated with benefits, including when ( and) contains assumptions about. hence the cost) to be obtained. Clearly, managers who need to do cost analysis will not know under the matching principle which costs will be included/excluded or are currently affecting their department.

The two financial accounting principles mentioned above briefly describe the gap that exists between financial accounting and managerial accounting objectives. The objective of financial accounting is to create a coherent set of standards for the purposes of consistency and comparability; Therefore, providing external parties in the capital market an equal opportunity to evaluate the individual performance of the company as well as that of other competing businesses. Where the objectives of management accounting exist, it is to inform internal managers about the right choices for long-term economic success.

As task force member Larry R. of the Managerial Cost Perceptual Framework at has been discussed with White,“Manufacturing companies, in particular, often run into problems using the GAAP model for internal costing purposes, White notes. “We have seen factories where salesmen line up to run their orders by the oldest production line in the factory. while new production lines and machines are sitting idle which will make orders quicker and with better quality. The reason is that the factory was incurring its cost on the basis of derivation of GAAP norms. As a result, fully depreciated machines had no depreciation charges attached to them, where the new machinery did.” [27]

Concepts and Constraints


Management accountants may rely on action – reason and analogy as fundamental principles as they are grounded in decision science – the laws of logic.

  • Cause-Cause Theory – The relationship between the quantitative output of a managerial objective and the input quantity that the output must have, or be consumed, in order to be achieved.

The theory of causality enables the modeling of an organization’s costs based on the relationship between the inputs and outputs of the resources involved in producing the products and services it provides. This is often straightforward when dealing with strong causal relationships (i.e. the raw materials to make Product A). However, where weak causal relationships exist, costs must be attributed according to the concept of attribute, which maintains causal integrity.

  • Analogy theory – the use of causal insights to infer past or future outcomes.

The principle of analogy governs the ability of the user of management accounting information to apply the knowledge or insight gained from modeled causal relationships using inductive and deductive reasoning about past and future results to continuous optimization efforts ( For example, in planning, controlling, what-if analysis).


The following concepts serve as operational guidelines and modeling building blocks for the two main principles (cause and analogy) in developing a reflective cause and effect model and then using the information provided by the model. These concepts aim to cover the different types of assumptions that make up a model, their characteristics and relationships, and provide a rational approach when modeling many managerial cost issues.

The first ten concepts support causal theory of modeling cause-and-effect-based modeling theories , while the remaining four concepts apply to the theory of analogy and are informational in nature and support managers with decision-making guidelines.Concepts applied to causality and modeling:

  • Speciality
  • Capacity
  • Cost
  • uniformity
  • Integrated data orientation
  • managerial objective
  • Resources
  • Accountability
  • traceability
  • Work

Concepts applied to analogy and use of information:

  • avoidance
  • divisibility
  • Interdependence
  • Mutually


The following constraints have been identified for management accounting . The quantitative and qualitative characteristics of these constraints are meant to act as controls or checks and balances when constructing cost models or when using management accounting information. The first five constraints are specific to causality , while the remaining two in cost models deal with constraints by analogy and use of information. [28]Constraints on Causality:

  • materiality
  • measurability
  • objectivity
  • verifiable

Constraints imposed on the use of analogous information:

  • conformity
  • fairness