We do not intend to review the history of management accounting in great detail here; for this, see Edwards and Boyns (2006) and Fleischmann and Tyson (2006) which provide extensive descriptions of the early historical development of cost accounting in the UK and USA. These articles, and other research, indicate that much of this history is contestable because of sparse records and the continuing discovery of new sources of information. Many studies also suggest that market pressures and changes in management structures drove firms to develop certain spe- cific internal accounting procedures (Chandler and Daems, 1979; Johnson, 1983).
But there is evidence and arguments that accounting practices have much wider and more dissipated origins (Baxter and Chua, 2006; Bhimani, 1996; Hopwood and Miller, 1994; Miller and O’Leary, 1987).
1.2.1 Costing Then
The early history of accounting within the firm from the 1840s to approximately 1910 firstly involves predominantly bookkeeping for costs and for revenues, with a major purpose being the valuation of inventories for financial accounting purposes.
Secondly, and secondarily, it involves the seeking of more sophisticated product costs and more accurately costed jobs, batches and orders. These developments tended to be the province not of accountants but engineers, and those accountants who were involved were financial accountants. Everyday costing was the province of a large army of unqualified clerks.
The most important accounting book on costing in the last quarter of the 19th century was an English book by Garcke and Fells, Factory Accounts: Their Principles and Practice (1887, with a large number of subsequent editions). 1 A good majority of their book addressed bookkeeping for costs and urged the inte- gration of cost accounts with the financial accounting system, but their understand- ing of costs was surprisingly modern. For example, they discussed accounting for prime cost (labour and material) and accounting to provide accurate costs for pric- ing. They recognised the importance of the distinction between fixed costs and costs that are variable with output. They attributed those overheads to products that were believed to vary with production, including depreciation and supervisory costs but not fixed costs such as general administrative costs. This understanding of ‘ modern ’ fixed and variable costs supported early advocacy of the ‘ break-even ’ chart (Hess,
1 Garcke was a working electrical engineer and company chairman. John Fells was a financial accountant who also worked in industry and became an adviser to many firms on keeping internal accounts.
1903). There is, however, little evidence that such costs were used for cost control or performance measurement.
These two strands – cost bookkeeping, including inventory valuation, and cost- ing for pricing – later formed the core of cost accounting. However, these ‘ mod- ern ’ views were not generally taken up by industry. Arbitrary rules of thumb for accounting, mainly for prime costs, predominated.
Concurrently with the introduction of new technologies, a variety of new meth- ods of attaching overheads to prime costs emerged from around the 1880s, with the machine hour rate gaining acceptance between 1900 and 1910. This system had an impact on practice. The allocation of overheads, although general practice then as it is today, had its contemporary critics – this criticism mainly being that it is market prices rather than accounting numbers which matter in decision making, and that any allocation of overheads is arbitrary. Both of these criticisms are still believed by some to apply today, but practice overwhelmingly continues to use overhead alloca- tion (Dugdale et al. , 2006) even though research consistently suggests that overhead allocation cannot be other than arbitrary (Thomas, 1969, 1974).
A conflict of views surrounds the causes of the birth of ICWA in 1919 and the effect of the First World War (1914 – 1918) on its founding and on costing more gen- erally. One view is that the War produced forces and conditions which led to the professionalisation of expertise relating to costing practice. There existed strong backing and enforcement by the government for verifiable costing because prices had to be based on costs (Loft, 1990). The War thus sponsored the emergence of professionalised costing expertise. Other research, however, suggests that costing was practised widely across firms and industries prior to the War (Edwards and Boyns, 2006) . This is not to deny that the War had a profound effect on the cost accounting profession. According to Loft (1990) the wide distribution of costing during the War and its continuing role in moderating inflation post-War created a suitable foundation for the formation of the ICWA 2 which she describes as the ‘ coming into the light of cost accounting ’ .
In the UK there was a wish among cost accountants to continue to enjoy the free- dom gained from the dominance of financial accounting and auditing during the War.
It was felt that the financial accounting bodies did little to encourage cost accounting and probably saw it as beneath the station of ‘ professional ’ accountants. The founders of the ICWA sought to make cost accounting fully professional, by providing educa- tion and examinations (not compulsory originally) and by seeking to make costing scientific. This was one of two objectives stated in CIMA’s charter granted in 1976.
The scope of cost accounting around the time of the creation of ICWA is suggested by looking at the relatively few textbooks available at that time. One contemporary
2 Originally titled the Institute of Cost Accountants Ltd but quickly changed to ICWA in order to avoid the Institute’s designatory letters conflicting with the then Institute of Chartered Accountants.
American book is Cost Accounting: Principles and Practice , published in 1920 (Jordan and Harris, 1920). Their concern with the then lack of progress in cost accounting, and the promise they saw it offering contemporary American industry, is well expressed as follows:
Hardly any other feature of industrial procedure has been so necessary, yet so slow in developing, as cost accounting – so rich in possibilities of usefulness for management of business, yet so widely considered for many years as a doubtfully necessary evil. (p. iii)
The book is largely concerned with the details of setting up a ‘ proper ’ cost system for each functional cost, thus purchasing and receiving goods were seen to require:
■ records of transportation charges, stocks and material usage,
■ the pricing of requisitions and
■ the calculation of minimum and maximum quantities of orders.
Although at that time much of industry used rudimentary accounting systems rather than the leading edge systems suggested in the book, much of its content indicates early concerns with some of today’s problems.
Cost accounting was then seen to concern not just pricing and inventory valu- ation but also cost control, but nevertheless this was in terms only of keeping accurate records, not generally in terms of comparison with plans. Standards are mentioned in the book, but only relative to the level of capacity usage that should be used when costs are to be estimated for pricing purposes.
Several chapters consider overhead allocation. They advocated department over- head rates using different rates within each department to try to capture the correla- tion between costs and activity usage, because of their believed greater accuracy relative to other methods. They also advocated the use of under- and over-absorption of overheads to deal with the variability of production, with non-recovered over- heads being charged not to manufacturing cost (which was the general practice) but to the profit and loss account. Of course, from a research perspective at least, most of this would be regarded as irrelevant to decision making, control and performance measurement.
At the time of the foundation of what was to become CIMA, internal accounting focused on transactional accounting. The incorporation of mainline subjects, such as standard costs, budgetary control, performance measurement and costs for deci- sion making, occurred subsequently within management accounting over a 90-year trajectory. The next section demonstrates this evolution by charting very briefly the development of cost accounting and management accounting from 1919 until
the present time. Such a focus is important in understanding today’s use of these techniques.