Why Management Accounting Principles & Its Objectives are Important

 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 principle 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 objectives.

The applications 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 organization's resources.

·  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 managerial activities

 

Concepts

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&Effect­based modeling principles, while the remaining four concepts are applicable to the Principle of Analogy and informational in nature and supports managers with decision making guidelines.

Concepts Applicable to Causality and Modeling:

·                   Attributability

·                   Capacity

·                   Cost

·                   Homogeneity

·                    Integrated Data Orientation

·                     Managerial Objective

·                     Resource

·                     Responsiveness

·                     Traceability

·                                         Work

Concepts Applicable to Analogy and Information Use:

·                     Avoidability

·                     Divisibility

·                     Interdependence

·                     Interchangeability

Constraint

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:

·                    Accuracy

·                    Materiality

·                    Measurability

·                    Objectivity

·                    Verifiability

Constraints Applicable to Analogy Information Use:

·                    Congruence

·                    Impartiality

Note: Please refer to the Managerial Costing Conceptual Framework for a complete and detailed discussion of principles, concepts, and constraints along with their practical application within an organization.