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The financial accounting principles

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 did.”[27]

Concepts and Constraints[edit]

Diagram of Principles, Concepts, and Constraints specific to the field of Management Accounting and its internal business users.

Principles[edit]

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 causality.

  • Analogy principle — the use of causal insights to infer past or future outcomes.

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