IMA aims to improve managerial costing systems

The Institute of Management Accountants has released a new report explaining how accountants can improve their organization’s costing models, tools and information to support better decision making.

Cost modeling for internal decision support has long been a neglected part of the finance function, and the costing practices at many organizations often fall short of their needs. As management accountants become more like strategic advisors at their companies, the IMA hopes to help them improve the financial data connections throughout their organizations.

The Statement on Management Accounting (SMA) report, “Costing System Attributes that Support Good Decision Making,” provides a resource for management accountants to address the internal decision-support capabilities of their organizations’ costing systems.

Institute of Management Accountants headquarters in Montvale, N.J.

“Many organizations today have ineffective costing systems,” said Raef Lawson, professor-in-residence and vice president of research and policy at the IMA. “They do not support managerial decision making and they’re primarily designed for external financial reporting. The IMA is trying to raise awareness of the need for better costing systems and to develop and give practitioners the tools they can use to do that.”

The report provides tools to assess the level of internal decision-support cost information that an organization needs to help managers meet the organization’s goals and objectives. It also enables helps an organization evaluate its current managerial costing capability and identify areas for improvement; and evaluate managerial costing solutions, such as software, to determine if they satisfy an organization’s decision-making needs.

The report is a companion piece to a previous SMA, “Developing an Effective Managerial Costing Model,” which builds on the IMA’s earlier Conceptual Framework for Managerial Costing.

“I view it as part of a trilogy,” said Lawson. “The first document was IMA’s conceptual framework for managerial costing. In our conceptual framework we listed 10 attributes — 10 ‘modeling concepts,’ we call them — that support design better costing systems. In this document we describe what those are and how practitioners can evaluate their current costing systems and then think about the level of sophistication or maturity of these attributes necessary for their organizations to have costing models that lead to better decision making. The goal is to provide information to management accountants that are designing costing systems on what attributes they should be looking for in their costing systems.”

The document doesn’t advocate for particular methodologies to avoid overhyping any particular software or model. “We purposely remain methodology neutral,” said Lawson. “We think that in the past there were a lot of costing methodologies that were heavily promoted by consultants and software firms that kind of turned off a lot of organizations. Before you even start thinking about specific methodologies, you should think about what attributes your costing system should have in order to let your managers make effective decisions. We list 10 concepts here at various levels of sophistication and maturity. We don’t advocate. We don’t say that every organization has to max out on all of these concepts. Every organization is different. They have different products, industries and competitive environments, so every company has to think about the level of sophistication that they need on these concepts and that will help guide them in their design of managerial costing models that will help managers make decisions to make them more profitable and successful.”

His group has heard from its members about problems with previous approaches to costing models.

“IMA has conducted numerous surveys and they consistently come back with the results that over 80 percent of organizations are dissatisfied with their costing system, so we’re trying to help these professionals address that issue by giving them guidance on how to design systems that will assist in decision making,” said Lawson. “The underlying problem is that the vast majority of companies have costing systems designed to meet external reporting requirements, and they’re not designed for assisting with better managerial decision making, and that’s a shame. It’s almost criminal that they are not providing the information managers need. Companies could be much more effective by reading these documents and designing better costing systems. One of the reasons why costing systems are ineffective is that they often fail to reflect the underlying operational relationships of the organization. They’re just financial models that don’t incorporate that operational understanding and are insufficient for practical decision making.”

Managerial costing systems often don’t work as promised because they’re not taking into account how the organization actually operates. “One of the primary objectives of the costing system should be to reflect what we call causality, that the tracing of costs should be based on the activities that costs are being incurred, and in many organizations that is not the case,” said Lawson. “The costing systems don’t reflect the underlying operations of the organizations or the capacity and consumption of the resources. If your costing system doesn’t do that, then the information that you’re basing your decisions on can lead to dysfunctional decision making.”

The guidance in the report isn’t industry specific. “We do note that of these 10 concepts some are more important in some industries than others,” said Lawson. “For example, if there’s a capital-intensive business, they would need to focus more on capacity management, but if it’s a people-intensive business they might want to focus more on optimization and improvement opportunities. The level of sophistication or maturity of a company on these 10 attributes will depend to some extent on the specific industry. It’s not one size fits all.”

The IMA is looking for feedback on the suggestions in the report. It includes a link to a survey that organizations can take to see how they are doing compared to other organizations.

“Any organization that completes our survey will get a report showing how they measure up against other organizations,” said Lawson. “We would like to encourage companies to participate in this survey. They’ll get a report where they will be able to benchmark themselves against other companies. We’re very anxious for people to participate in this survey because it will give them good feedback, and it will also help us understand where companies stand and what dimensions of their systems they need to potentially work on improving.”

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