INDEPENDENT UNIVERSITY,

BANGLADESH

MBA 513: MANAGEMENT ACCOUNTING

ASSIGNMENT ON

THE HISTORICAL DEVELOPMENT OF

MANAGEMENT ACCOUNTING

Submitted to: Mr. Mahfuzul Hoque Ph.D

IMPORTANCE OF LITERATURE REGARDING
THE HISTORICAL DEVELOPMENT OF
MANAGEMENT ACCOUNTING
 A wealth of literature exists regarding the historical
development of management accounting and accountants
have many reasons to study this literature.

 It leads to rediscovery of old ideas that have been lost.

 Itenables one to support proposal with past writings. Quoting

from an important work in management accounting can help
sell a proposal or give credence to an idea.
IMPORTANCE OF LITERATURE REGARDING THE
HISTORICAL DEVELOPMENT OF MANAGEMENT
ACCOUNTING
 As with study of any literature, it provides accountants with
opportunities to improve their verbal abilities, both written and oral.

 It familiarize accountants with the intellectuals and innovators who

have shaped how accounts proactive their profession.

 It illustrate the state of the professionalism of the field.

 It leads to an awareness of the controversial topics in the field.

 HISTORICAL DEVELOPMENT OF
MANAGERIAL ACCOUNTING

 Even though one can not find the first management

accountant or the first signs of the field, there is a
consensus regarding the monumental importance of the
first printed treatise on accounting by Luca Pacioli in
1494.
 PACIOLI AND THE RENAISSANCE
 1200s: The first vestiges of double-entry accounting
came from various Italian city states at about the very
end of the 1200. The first printed text of accounting
came out of this period

 1494: Luca treatise on Double entry accounting or

“The Method of Venice” as practitioner have
nicknamed it, described a method of accounting that
bankers and merchants had practiced in the Italian city
states for about 200 years. His text book “Summa de
Arithmetica, geometica, proportioni et
proportionalita” was the leading mathematics textbook
in Italy for many years.
 DOUBLE ENTRY SYSTEM

 Double entry system popularized by Pacioli and those

who copied the ideas in his treatise to develop similar
works throughout Europe, allowed a much better way
to visualize immediately the results of operation.
 “THE METHOD OF VENICE”
 Pacioli stressed the importance of owner’s involvement
into the recordkeeping activities of the organization.

 He said, “the merchant can be said to be like a cock

which of all animals is the most vigilant, and in winter
and summer keeps his nocturnal watch and never rests…
and a merchant’s head may be compared to one with a
hundred eyes which nevertheless are not sufficient for
him in word or in deed.”
 “THE METHOD OF VENICE”
 It gave the concept of profit or loss arising from various
inventory items or various ventures or both.

 Pacioli did not recommend a detailed analysis of what we

today call common costs (i.e., overhead) because he did not
want to trouble the merchant with minor details of freight and
of the wages of employees and apprentices in the ship.

 It was merchant oriented not manufacturing.

 INDUSTRIAL REVOLUTION AND
MANAGEMENT ACCOUNTING
The beginning of the industrial revolution called for another extension
of accounting into a manufacturing environment

 Industrial revolution led to an increase of the scale of

business. The changeover from agrarian and handicraft
economy to a machine-based economy.

 Recent interest in the history of management accounting has

led to a number of studies of British and French firms between
1750 and 1850.

 The Carron company and the Boulton and Watt company

offer two examples of companies in which management
accounting played an important role.
 INDUSTRIAL REVOLUTION AND
MANAGEMENT ACCOUNTING
 The Carron company:

 Founded in Scotland in 1759, became a pioneer iron foundry.

 Used many management accounting techniques:

 Expense control
 Responsibility management.*
 Product costing
 Overhead allocation
 Cost comparison*
 Cost for special decisions In those starred (*) techniques the
 Budgets Carron company showed superior
 Forecasts management
 Standards*
 And inventory control
 INDUSTRIAL REVOLUTION AND
MANAGEMENT ACCOUNTING
 The Carron company:

 It did not integrated its cost records with its general ledger,
especially in its earlier years. Overhead allocation occurred
after the end of the year.

 The company increased the amount of overhead it allocated

to product.
 INDUSTRIAL REVOLUTION AND
MANAGEMENT ACCOUNTING
 Boulton and Watt: (This company manufactured the steam engine.)
 The founder James Watt. Jr and Matthew Robinson Boulton became
pioneer in cost management.

 They used all the Carron techniques except for overhead allocation.

 Their methods show superior cost management regarding

 Expense Control;
 Responsibility Management
 Product Costing
 Cost Comparison
 Budget It did not have a good handle on
 Forecast overhead or on integration of its
 Standards cost records with the general ledger,
 Time studies and piecework system it did articulate material and labor
standards in an acceptable manner.
 INDUSTRIAL REVOLUTION AND
MANAGEMENT ACCOUNTING
 Robert Hamilton: (Rector of Perth Academy, chairman of Natural Philosophy at the
university of Aberdeen, 1817)

 He realized the necessity for complex manufacturing firms to break out of

the mechanical accounting model.

 He included such topics as

 transfer pricing
 Joint costs
 Calculation of the rate of return
 Residual income

 Jean – Baptiste Payen: ( writer of Essay Of Book Keeping)

 Give a good grasp of overhead, including wear and tear on tolls and depreciation of
furnace
 INDUSTRIAL REVOLUTION AND
MANAGEMENT ACCOUNTING
Charles Babbage: ( Father of the computer)
 Though he was not accountants but contributed to the field.
He favored the result of a fair day’s work, a precursor of
standard costing.
Babbage urged the manufacturer to have a good notion of what
costs should be before measuring them.
He recommended that the name of the work-man be noted on
his efforts.
He espoused Adam smith’s notion of the superiority of
speicialization in the division of labor.
He called for a measurement of the wear and tear on
machinery, so that companies could make cost comparison to
discover lower cost method of accomplishing a task.
 INDUSTRIAL REVOLUTION AND
MANAGEMENT ACCOUNTING
Continuation…
 Babbage noted the importance of operating machinery 24 hours a
day, to maximize output from such expensive capital investments.

Landner’s book: Railway Economy 1855

 Lardner thought that a company should know the cost of each
class of object transported.

 He argued past data would prove useful for furniture predictions.

 He illustrated different calculation of management accounting by

the end of the first of the nineteenth century.
 ERA ENGINEERING AND
SCIENTIFIC MANAGEMENT
 1880-1920,
 engineers dominated the progression of management
were the prime movers of the scientific management
movement.
 1885,
 Captain Henry Metcalfe an American Army wrote the
first modern book on management accounting, The cost
of manufacturers and the administration of workshops.
 The system required that the workman note the time he
spent on each job on a separate labor card, filed by job
number.
 ERA ENGINEERING AND SCIENTIFIC
MANAGEMENT
 1887,
 Emile Garcke English electrical engineer and John
Manger fells an accountant published Factory Account :
Their principles and practice. They presented a tightly
integrated system for prime cost, which featured
perpetual inventory and a job order system.

 Many still recognize Frederick Winslow Taylor is

called the father of scientific management. Basically
Taylor published his two classics, the principles of
scientific management and shop management.
 ALEXANDER HAMILTON CHURCH
 Alexander Hamilton Church the most influential
figure of the early twentieth century.
 He mainly introduced the manufacturing overhead
and the activity-based casting.
 Church published in 1909, a six article series in the
Engineering Magazine, which became the 1910
book Production Factors in Cost Accounting.
 Church also discussed accounting for waste and he
fully developed the machine hour-rate method.
 ALEXANDER HAMILTON CHURCH
 In 1930, Church published Overhead Expenses : In
relation to casts, sales and profits.
 Church contributed to the field of management as well
as accounting.
 Church authored innovative and successful ideas
regarding many facets of management. He placed
accounting into the dynamics of management.
 PROFESSIONAL INSTITUTIONS
 The most two significant institutions that have provided
research for management.
 The national Association of cost Accountants (NACA), in
the United Kingdom And the another one is the Institute of
Cost Accountants, in the United Kingdom.
 The NACA became the National Association of
Accountants (NAA) in 1957 and then the Institute of
management Accountants (IMA) in 1991.
 The Institute of Cost Accountants was renamed the Institute
of Cost and work Accountants in 1972, became the Institute
of Cost and management Accountants in 1986, It became
the Chartered institute of Management Account.
 STANDARD COST:
 Its main purpose is continuous improvements in quality and
cost control. The standard cost is a complex system of
reporting a product and its unit basis cost experimentation
in right way through some rules and accounting system. It’s
included each and every unit direct, indirect and provision
cost. By summing these component a product cost (through
computing all the possible unit cost) become appears that
shows the probability of selling price. Before selling,
accountants or standard costing experts should have to
prove the cost of a product and it’s each and every unit. To
do this standard costing experts have struggled with several
issue. But, they are pretty much able to overcome these
problems.
 STANDARD COSTS
 Standard Costs has meant a compilation of those things should cost
a means of reporting deviations from the normative amounts, and a
mechanism for deciding when deviation require attention.

1921
 G, Charter Harrison is the father of Standard Costing- felt the
accountant should hold the dominant position among FW Taylor or
Harrington Emerson.

1930

 Harrison Eric A and Cecil Gillespie had written explicit how to
textbooks. With the first edition of Standard cost for
manufacturing

 1947-1960
 Stanley Henrici became the leading writer on this topic. He
introduced the concept of super standard for management, rather
than for supervision use.
 STANDARD COSTS
 1964
 Zenon S. Zannotos stressed the need for a more
advanced probabilistic approach.
 1975

 Robert S. Carnegie: Reviewed several academic studies

to help accounts understand statistical procedure.
 1987

 Peter Miller and Ted O’ Leary used a behaviorist

approach to criticize standard costing stressing that it
reflected the imposition of the power of the firm on its
workers.
 STANDARD COSTS
 1989
 Michihauru Sakurai and Philip Y Huang carried out a study
that noted that Japan used standard costing for financial
accounting purpose and Japanese developed the target costing
technique, which controls cost at the design stage.

 Another study indicated dissatisfaction with standard costing

from a just in time viewpoint. William Mosconi and Thimaas
Norris (Former coopers and Lybrand) found that a firm could
better attain the JIT goal of continuous improvement by using
a rolling average of job costs than by an inflexible standard
costing system.
 UNIFORMITY AND WORLD WAR I:
 During the war time manufacturing goods condition was
not good. The war effect was on the industrial product.
So, the national governments attempted to cost control.
One way to exert cost control was to establish uniform
accounting system in industry. Uniformity refers to
restrict some cost boundaries through a structure. This
type of accounting system was also used in cost plus
pricing agreements.
 J. M CLARK’S STUDIES IN THE ECONOMICS OF
OVERHEAD COSTS
 J. M CLARK runs a study on the economics overhead
costs. One of his major contributions to accounting is the
four logical bases on which to apportion overhead: (a)
ability to pay; (b) causal responsibility; (c) benefit or
use; (d) stimulus to more cost effective use by charging
the cost against a cost object where the responsible party
has the opportunity to reduce costs. Another lasting
contribution has been his notion of different costs for
different purpose. Perhaps the most effective way to
illustrate the scope of Clark’s text is to show its table of
contents.
DISTRIBUTION COST AND ITS SUPPLY CHAIN
MANAGEMENT:
 1925
 Herbert Hoover’s: Hoovers listed 15 kinds of waste in a national
distribution conference three of which pertained to the distribution cost issues,

 Waste from unnecessary multiplication of terms sizes and varieties

 Waste due to many links in the distribution chain and too many chains in the system and

 Wastes due to enormous expenditure of effort and money in advertising and sales promotion effort
without adequate basic information on which to base sales promotion .

 1930
 Haward C. Greer, a writer for 5 decades stressed that cost
accountants must give the same attention to distribution costs that they
give to production cost. Allocating distribution costs by commodities,
territories, customers and so forth required imagination.
DISTRIBUTION COST AND ITS SUPPLY CHAIN
MANAGEMENT:
 1936
 The Pollster A.C. Nielsen stressed the importance of customer sales- which
included distribution costs- rather than factory sales.

 1938
 Charles Reitell suggested that distribution costs use standard costing techniques,
thus exchanging precision for guesswork.

 1953
 Heckert and Miner’s book contained a series of lists, including a list of 43
items of distribution data that firm should collect.

 1955
 Longmand and Schiff discussed 35 possible actions to reduce losses in
processing small orders.
 DIRECT COSTING:
 The major part of a product is covered by direct cost.
Direct costing is a standard costing which is related from
manufacturing to finished goods. To calculate direct
costing accountants need managerial information. Direct
costing is under manufacturing overhead cost and its
have major impact in production and its profitability. In
the twenty century direct costing practices had began and
now it is the main decidable things of an industry
success or failure. When a company has an inventory
their profits automatically increase. It refers inventory
includes direct materials, direct labor and manufacturing
overhead.
 CAPLAN’S MANAGEMENT ACCOUNTING
AND BEHAVIORAL SCIENCE

 A number of accounting researchers started in the 1960s. its

extended the traditional field of management accounting by
introducing findings from behavioral school of management.
Caplans tested the traditional view of motivation by economic
reward. He warned that a tight control system may prove
counter-productive because it could foster negative attitude
toward the company and the fear of motivations. He
developed the traditional management accounting model into
four parts assumption about organizational goals, assumptions
about the behavior of participants, assumptions about the
behavior of management, assumptions about the role of
management accounting.
 SOLOMONS’S DIVISIONAL
PERFORMANCE: MEASUREMENT AND
CONTROL

 David solomons received a research grant in 1961 from

the financial executive research foundations to study
how to optimize performance of divisions within large
corporations.
 JOHNSON AND KAPLAN’S RELEVANCE
LOST

 Johnson and kaplan’s pudlished relevance lost the rise

and fall of management accounting. Its provide the
foremost example of using historical analysis to prepare
management accountant for a more proactive role in
organizations. A review of the Carnegie steel company
described Andrew carnegie’s great interest in controlling
and lowering prime cost. The development of railroads
in the second quarter of the 1800s gave management
accountant an opportunity to participate in controlling a
geographically divergent organization.