Management Accounting is future-oriented

To Gary Cokins, Larry White, and Raef Lawson

Investors buy shares in a company because they expect it to consistently generate profits “in line with the market”. This means that the company will generate more net profit per dollar invested than the average of its competitors.

To meet these expectations, managers usually take the success-determining decisions during the planning process. Therefore, management accountants have the primary task to support all managers in planning and controlling their business. To do so, the managers plans must be quantified in such a way that it becomes clear which costs are caused directly by the units produced (proportional) and which costs are caused by the company's readiness to perform (fixed period costs).

My application experience and the available scientific findings show that so far only Resource Consumption Accounting RCA (marginal costing or flexible standard costing propagated by Larry White) can provide the decision-relevant information.

In Gary Cokins' “Costing Levels Continuum Maturity Framework”, a company must reach level 11 in order to meet these requirements. It does not help salespeople or cost-center managers if annual depreciation or fixed-period costs are allocated to products or customers.

In external reports required by law, the capitalization of fixed period costs can improve results, but they become losses in the following year, if sales do not increase. Similarly, charging unused capacity costs to divisions or products is of little benefit. This is because the capacity is there and has been paid for. If it cannot be used, it is a “non-valeur “and should therefore not be included in fixed assets any more.

PACE is a great initiative to show controllers and management accountants how they should set up and operate their planning and control systems so that their managers can use the information for the sustainable and successful development of their company. After all, these managers also pay the salaries of the management accountants.

Tax law aspects or valuation regulations from US GAAP or IFRS have very little to do with this. Potential investors will continue to focus on those companies that can be expected to generate a higher return per dollar invested in the future.

Existing training organizations for accountants do not seem to have grasped this aspect. Compliant external reporting seems to be more important than the financial success of the company and its future.

PACE continues to be right to focus consistently on the development of management accounting for planning and control. This is because investors are primarily interested in future developments and less in what has been achieved to date.