Profitability and Cost Management Shared Interest Group

Most cost information accountants generate and present is based on financial reporting standards and generally accepted accounting practices (GAAP).   It is normally "truthful" to those standards.  But is it "truthful" for other uses? 

Internal decision support information needs to be "truthful" for economic realities that are more expansive and complex than accounting standards.   How can both be truthful and different?  This is truly a question the accounting profession needs to do a much better job of addressing.  Many accountants are hesitant to leave the well-defined safety of their accounting standards and rules. The Profitability Analytics Framework provides a guide to a new definition of "truthful".

Let's examine "Truth".  It has five major theories to define it according to Wikipedia:

·       Correspondence Theory – Truth corresponds to facts.

·       Coherence Theory – Proper fit of elements within a whole system.

·       Constructivist Theory – Constructed by social processes

·       Consensus Theory – Whatever is agreed upon

·       Pragmatic Theory – Putting concepts into practice

Only the Correspondence Theory is relevant to science and the scientific method.  All the other theories of truth contain social/human compromises. 

What type of "truth" do you want to use for internal, long term decision making?   Unless you are only looking at a quarterly bonus tied to financial statement results, you want to use the Correspondence theory to make long term value creating decisions.  And that "truth" is what the Profitability Analytics Framework uses for modeling operations and cost for internal decision support.  The Correspondence Theory of truth is what your operational systems use to help you optimize operations. (Not many operational systems are beholden to a group of people like the five accountants in Norwalk, CT (FASB) or the IASB to define standards for operating "truth".)

Cost and operational information for internal decision making needs to reflect the "Laws of Nature", or factual reality and causal relationships.  Accounting standards for financial reporting are clearly "Laws of Men", resulting from a social consensus process.  Fortunately, this is not an "either/or" choice.  You can, and should, have both operating in your organization.

Does your organization recognize the different definitions of "Truth"?  

Wow! 😃 This is super interesting, and it really opened my eyes to something I hadn't thought about in such depth before! I love how you differentiate between the "truth" of accounting standards and the "truth" needed for internal decision-making. It makes TOTAL sense, but how easy it is to get stuck in the safety net of the rules, right? 🙈

The idea of using the Correspondence Theory for long-term decisions is just brilliant. Of course, if we want to create real value, we need to work with data that reflects reality, not just what's "acceptable" for financial statements. The Profitability Analytics Framework sounds like the perfect bridge between these two worlds! 🌉

And that comparison between the "Laws of Nature" and the "Laws of Men" - wow, what a powerful way to explain it! It's such a great reminder that, as accountants, we can (and should!) go beyond compliance and focus on being true strategic partners for our organizations.

I'm definitely walking away with this key insight: both "truths" can and should coexist within an organization, but we have to be intentional about which one we're using and when. Thank you for sharing this-it's super motivating, and now I'm excited to dive deeper into the Profitability Analytics Framework! 💡💪

Most cost information accountants generate and present is based on financial reporting standards and generally accepted accounting practices (GAAP).   It is normally "truthful" to those standards.  But is it "truthful" for other uses? 

Internal decision support information needs to be "truthful" for economic realities that are more expansive and complex than accounting standards.   How can both be truthful and different?  This is truly a question the accounting profession needs to do a much better job of addressing.  Many accountants are hesitant to leave the well-defined safety of their accounting standards and rules. The Profitability Analytics Framework provides a guide to a new definition of "truthful".

Let's examine "Truth".  It has five major theories to define it according to Wikipedia:

·       Correspondence Theory – Truth corresponds to facts.

·       Coherence Theory – Proper fit of elements within a whole system.

·       Constructivist Theory – Constructed by social processes

·       Consensus Theory – Whatever is agreed upon

·       Pragmatic Theory – Putting concepts into practice

Only the Correspondence Theory is relevant to science and the scientific method.  All the other theories of truth contain social/human compromises. 

What type of "truth" do you want to use for internal, long term decision making?   Unless you are only looking at a quarterly bonus tied to financial statement results, you want to use the Correspondence theory to make long term value creating decisions.  And that "truth" is what the Profitability Analytics Framework uses for modeling operations and cost for internal decision support.  The Correspondence Theory of truth is what your operational systems use to help you optimize operations. (Not many operational systems are beholden to a group of people like the five accountants in Norwalk, CT (FASB) or the IASB to define standards for operating "truth".)

Cost and operational information for internal decision making needs to reflect the "Laws of Nature", or factual reality and causal relationships.  Accounting standards for financial reporting are clearly "Laws of Men", resulting from a social consensus process.  Fortunately, this is not an "either/or" choice.  You can, and should, have both operating in your organization.

Does your organization recognize the different definitions of "Truth"?  

Pedro,

Thank you for your enthusiastic comments.   I hope others see the benefit of this differentiation; it is vitally important but often overlooked in the Management Accounting profession and in accounting academia.

If this topic is of interest, here is a more explanatory document that covers the topic in more detail:  Alta Via Managerial Costing Ebook.TruthinMA.pdf

This information was part of the IMA Task Force Report on a Conceptual Framework for Managerial Costing; however, that document is no longer posted on the IMA Website.

Wow! 😃 This is super interesting, and it really opened my eyes to something I hadn't thought about in such depth before! I love how you differentiate between the "truth" of accounting standards and the "truth" needed for internal decision-making. It makes TOTAL sense, but how easy it is to get stuck in the safety net of the rules, right? 🙈

The idea of using the Correspondence Theory for long-term decisions is just brilliant. Of course, if we want to create real value, we need to work with data that reflects reality, not just what's "acceptable" for financial statements. The Profitability Analytics Framework sounds like the perfect bridge between these two worlds! 🌉

And that comparison between the "Laws of Nature" and the "Laws of Men" - wow, what a powerful way to explain it! It's such a great reminder that, as accountants, we can (and should!) go beyond compliance and focus on being true strategic partners for our organizations.

I'm definitely walking away with this key insight: both "truths" can and should coexist within an organization, but we have to be intentional about which one we're using and when. Thank you for sharing this-it's super motivating, and now I'm excited to dive deeper into the Profitability Analytics Framework! 💡💪

Most cost information accountants generate and present is based on financial reporting standards and generally accepted accounting practices (GAAP).   It is normally "truthful" to those standards.  But is it "truthful" for other uses? 

Internal decision support information needs to be "truthful" for economic realities that are more expansive and complex than accounting standards.   How can both be truthful and different?  This is truly a question the accounting profession needs to do a much better job of addressing.  Many accountants are hesitant to leave the well-defined safety of their accounting standards and rules. The Profitability Analytics Framework provides a guide to a new definition of "truthful".

Let's examine "Truth".  It has five major theories to define it according to Wikipedia:

·       Correspondence Theory – Truth corresponds to facts.

·       Coherence Theory – Proper fit of elements within a whole system.

·       Constructivist Theory – Constructed by social processes

·       Consensus Theory – Whatever is agreed upon

·       Pragmatic Theory – Putting concepts into practice

Only the Correspondence Theory is relevant to science and the scientific method.  All the other theories of truth contain social/human compromises. 

What type of "truth" do you want to use for internal, long term decision making?   Unless you are only looking at a quarterly bonus tied to financial statement results, you want to use the Correspondence theory to make long term value creating decisions.  And that "truth" is what the Profitability Analytics Framework uses for modeling operations and cost for internal decision support.  The Correspondence Theory of truth is what your operational systems use to help you optimize operations. (Not many operational systems are beholden to a group of people like the five accountants in Norwalk, CT (FASB) or the IASB to define standards for operating "truth".)

Cost and operational information for internal decision making needs to reflect the "Laws of Nature", or factual reality and causal relationships.  Accounting standards for financial reporting are clearly "Laws of Men", resulting from a social consensus process.  Fortunately, this is not an "either/or" choice.  You can, and should, have both operating in your organization.

Does your organization recognize the different definitions of "Truth"?