What is Causality for Profitability Analytics?

When I’m ask this question I never know whether to happy for the chance to answer it, or angry that the accounting profession and accounting education has become so rules oriented that something as natural, logical, and simple as cause and effect relationships, which are merely the foundation of science, require explanation or their relevance to management accounting.

Causality refers to the principle of causality which is the fundamental principle for modeling in the IMA Conceptual Framework for Managerial Costing (CFMC). The formal definition in the CFMC is:

“Causality: The relation between a managerial objective’s quantitative output and the input quantities consumed if the output is to be achieved.”

The essence of the definition is the cause and effect relationships among resources in a process - real events and actions. Causality is fundamentally non-monetary – three pounds of Material A and 1 pound of Material B are required by Machine C and Operator D for 10 minutes to create Output E. This logic can be extended to marketing, revenue, and sales processes as well, though the precision may vary when the environment/economy external to the company is involved.

Creating a monetary model of a process can be done in many ways based on the rules, assumptions, or techniques applied; however, the monetary model does not change the cause-and-effect relationships among the process and resources. The monetary model can reflect them accurately, or the monetary model may distort the appearance of the causal relationships to comply with a rule, to maintain simplicity and efficiency, or to conform to the limitations of a technique or system. If a distorted monetary model is used for decision making, it can have a negative effect on the process (future actions) if the actual resources and processes are changed in an inefficient or illogical way.

The Profitability Analytics Framework adopts causality as the fundamental principle that must be followed to create effective models and information for internal decision support. The Framework supports creating an operational model of process and resources first, then creating monetary models and collecting the monetary data to reflect those causal relationships at the level of accuracy necessary for managers and employees to make effective decisions.

The CFMC recognizes several constraints that will always exist when creating models.Monetary modeling can never reflect causality perfectly, but we must always remember that causal relationships exist operationally and are readily available to examine.Financial internal decision support information should be firmly grounded and frequently compared to the reality of resources and processes that are in operation or in the process of being improved.