Why We Need a Conceptual Framework for Managerial Costing
White, Larry, Clinton, B. Douglas, Merwe, Anton van der, Cokins, Gary, Thomas, Chuck, Templin, Ken, Huntzinger, Jim, Strategic Finance
IMA[R] recently established a seven-member task force to draft a conceptual framework for managerial costing that will define practical principles and concepts to improve cost modeling and decision support inside organizations. Managerial costing, a central area of practice in management accounting, will gain credibility, wider application, and greater visibility when a clear framework exists. The framework will support the practices and techniques for internal cost and operational modeling that create critical business information for managerial insights, analysis, and decision making.
This article introduces the topic to IMA members and seeks to increase awareness of the need for such an endeavor. The task force believes multiple benefits will accrue to the management accounting profession as a result of this pursuit (see "Benefits of a Managerial Costing Framework," p. 38).
The Need for a Managerial Costing Framework Is Here
Managerial costing is a subset of management accounting that focuses on connecting operational resources and processes with their monetary value to generate the information required for effective decision support and value creation. Management accounting is much broader than managerial costing and includes cost accounting to sup-port external financial reporting, behavioral issues, performance evaluation, and many other subject areas. Managerial costing satisfies what we believe to be the core purpose of management accounting--supporting decision making to achieve enterprise optimization. Managerial costing includes capacity costing, marginal and incremental costing, and costing for process optimization, to name a few areas of costing necessary to opera-tionalize strategic cost management.
Working within this scope, the task force constructed a conceptual framework and carefully defined principles and concepts that focus on managers and employees throughout the company as the primary customer of the information. Our main objective was to satisfy the needs of those seeking to understand the interaction of operational resources, their values, and outputs. The fulfillment of this objective will be a significantly improved ability to identify optimal decision alternatives and create sustain-able value. Given the growth of financial planning and analysis groups within CFO organizations, we believe this objective is of immediate interest.
A managerial costing framework will create a clearer path and minimize risk for decision makers as they evaluate the methods, practices, expertise, and technology tools needed to achieve their goals for decision-making information. Currently, no clear or accepted approach exists for differentiating the characteristics of a beneficial managerial costing approach from those that are deficient and potentially misleading to managers. A wide variety of managerial costing approaches, such as traditional standard costing, activity-based costing (ABC), throughput costing, lean accounting, German managerial costing (known as GPK), and resource consumption accounting (RCA), claim to provide superior information for cost modeling and decision making, but do they? All businesses would benefit from a clear benchmark that would help them evaluate the characteristics and effectiveness of cost modeling and decision support options. Selecting a costing and decision support approach is particularly challenging for smaller and midsize organizations because they have limited financial, IT, and personnel resources and expertise to invest in, implement, and operate a decision support system.
A conceptual framework for managerial costing also should more clearly differentiate the types, objectives, and purposes of costing (e.g., internal decision support from external financial reporting). Defining managerial costing principles and concepts clearly and concisely will increase the awareness of the significant differences and consequences of using costing information. …