A History of Management Accounting : The British Experience 9781136232664, 9780415416238

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ROUTLEDGE NEW WORKS IN ACCOUNTING HISTORY

A History of Management Accounting The British Experience Trevor Boyns and John Richard Edwards

A History of Management Accounting

Routledge New Works in Accounting History EDITED BY GARRY CARNEGIE (Melbourne University Private, Australia), JOHN RICHARD EDWARDS (Cardiff University, UK), SALVADOR CARMONA (Instituto de Empresa, Spain) & DICK FLEISCHMAN (John Carroll University, USA) 1 The Institute of Accounts Nineteenth Century Origins of Accounting Professionalism in the United States Stephen E. Loeb and Paul J. Miranti, Jr. 2 Professionalism and Accounting Rules Brian P. West 3 Accounting Theory Essays by Carl Thomas Devine Edited by Harvey S. Hendrickson and Paul F. Williams 4 Mark to Market Accounting “True North” in Financial Reporting Walter P. Schuetze, edited by Peter W. Wolnizer 5 A History of Auditing The Changing Audit Process in Britain from the Nineteenth Century to the Present Day Derek Matthews 6 Contemporary Issues in Financial Reporting A User-Oriented Approach Paul Rosenfield 7 The Development of the American Public Accounting Profession Scottish Chartered Accountants and the Early American Public Accounting Profession T. A. Lee

8 Two-Hundred Years of Accounting Research Richard Mattessich 9 Double Accounting for Goodwill A Problem Redefined Martin Bloom 10 Accountancy and Empire The British Legacy of Professional Organization Chris Poulloas and Suki Sian 11 Critical Histories of Accounting Sinister Inscriptions in the Modern Era Edited by Richard K. Fleischman, Warwick Funnell and Stephen P. Walker 12 A History of Management Accounting The British Experience Trevor Boyns and John Richard Edwards

A History of Management Accounting The British Experience Trevor Boyns and John Richard Edwards

NEW YORK

LONDON

First published 2013 by Routledge 711 Third Avenue, New York, NY 10017 Simultaneously published in the UK by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 Taylor & Francis The right of Trevor Boyns and John Richard Edwards to be identified as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging-in-Publication Data Boyns, Trevor. A history of management accounting : the British experience / by Trevor Boyns and John Richard Edwards. p. cm. — (Routledge new works in accounting history ; 12) Includes bibliographical references and index. 1. Accounting—Great Britain—History. 2. Managerial accounting— Great Britain—History. I. Edwards, J. R. II. Title. HF5616.G7.B68 2012 658.15'110941—dc23 2012007558 ISBN13: 978-0-415-41623-8 (hbk) ISBN13: 978-0-203-10087-5 (ebk) Typeset in Sabon by IBT Global.

Contents

List of Figures List of Tables List of Abbreviations Preface Acknowledgments

vii ix xi xiii xvii

PART I Structure and Methodology 1

Introduction

2

Theoretical and Explanatory Framework

1 13

PART II Late Middle Ages to the Industrial Revolution 3

Estate and Farm Accounting

41

4

Merchants’ Accounts

68

5

Pre–Industrial Revolution Cost Calculation and Management Accounting

97

PART III Industrial Revolution to c.1970 6

Industrial Development, c.1760–c.1870

129

vi Contents 7

The Second Industrial Revolution, c.1870–c.1918

167

8

Professionalisation, c.1919–c.1970

204

9

Cost Calculation to Management Accounting, c.1919–c.1970

233

10 Reflections Notes Bibliography Index

274 287 307 341

Figures

3.1 Charge and discharge statement. 3.2 Coal works on Lee Heath in Entry Book and Abstract, year to Lady-Day 1759. 9.1 The emergence of managerial control. 9.2 The components of management accounting.

58 60 255 272

Tables

3.1 3.2 4.1 5.1 5.2 5.3

5.4 5.5 5.6 6.1

6.2 6.3 6.4

8.1 8.2

Authors and Occupations Content of Texts Selected Treatises on Double Entry Bookkeeping Trial Smelting of Coniston Ore, c.1600 Estimated Cost of Making 1 cwt of Rough Copper from 9½ cwt of Copper Ore in a Shift, c.1600 Estimated Profit Arising from the Conversion of 1 cwt of Rough Copper into Malleable Copper and Forging into Vessels, c.1600 The Cost of Making a Ton of Copper at the Landore Works in the 1730s Comparative Costs and Profits of Producing Copper at Redbrook and Neath, c.1740 Philip Foley’s Calculation of the Yield of His Ironworks for 1669 Distribution of Population of England and Wales According to Source of Income, 1781–1831 (in Millions and as a Percentage of Total Population) The Structure of the British National Product, 1801–71 (Percentages) Estimated Percentage Distribution of Total British Labour Force, 1801–71 Sectoral Shares of Output, Labour and Capital in the Whole Economy (Main Sectors), 1850–1913 (All Figures are Percentages) The Use of Words and Phrases in the Titles and Texts of Works Published Between 1870 and 1918 The Use of Words and Phrases in the Titles and Texts of Works Published Between 1919 and 1939

51 53 73 105 107

109 110 113 121

134 134 134

135 222 223

x

Tables

8.3 Membership of the ICWA and Other Accountancy Bodies, 1919–71 9.1 Netherton Iron Works, Half-Yearly Cost Statement, June 1913 9.2 Phases in the Relationship Between Cost and Financial Accounts 9.3 Known Cases of the Use of Budgets and Budgetary Control in British Businesses to c.1942–43 9.4 Known Cases of Standard Costing in British Industry to c.1942–43 9.5 The Development of Budgetary Control and Standard Costing, Evidence from The Cost Accountant, June 1950– May 1956

227 247 251 259 261

265

Abbreviations

AACP ACA ACCA ACIS ACWA AGM AIIA ALAA AMIEE AMIME ASAA

BEA BFMP BICC BOAC BSA BTC CA

CDA COPAC Cr. DCF DEB DORA Dr. FCA FCIS

Anglo-American Council on Productivity Associate of the ICAEW Association of Certified and Corporate Accountants Associate of the Chartered Institute of Secretaries Associate of the ICWA Annual General Meeting Associate of the Institute of Industrial Administration Associate of the London Association of Accountants Associate Member of the Institute of Electrical Engineers Associate Member of the Institute of Mechanical Engineers Associate of the Society of Accountants and Auditors/ Society of Incorporated Accountants and Auditors from 1908/ SIAA from 1954 British European Airways Ltd. British Federation of Master Printers British Insulated Callenders’ Cables Ltd. British Overseas Airways Corporation Birmingham Small Arms Ltd. British Transport Commission Member of the Society of Accountants in Edinburgh/ Institute of Accountants and Actuaries in Glasgow/ Society of Accountants in Aberdeen/ ICAS from 1951 Charge and discharge accounting Consortium of Online Public Access Catalogues Credit(or) Discounted cash flow Double entry bookkeeping Defence of the Realm Act Debit(or) Fellow of the ICAEW Fellow of the Chartered Institute of Secretaries

xii Abbreviations FCWA FIAC FIIA FREconS FSAA

FSS GDP HBC ICAEW ICAI ICAS ICI ICMA ICWA IIA IMTA LSE M-form MIEE MRGs NCB PE ROCA ROCE SIAA T&FR TNA UOP

Fellow of the ICWA Fellow of the Institute of Company Accountants Fellow of the Institute of Industrial Administration Fellow of the Royal Economic Society Fellow of the Society of Incorporated Accountants and Auditors/ Society of Incorporated Accountants and Auditors from 1908/ Society of Incorporated Accountants from 1954 Fellow of the Statistical Society Gross Domestic Product Hudson’s Bay Company Institute of Chartered Accountants in England and Wales Institute of Chartered Accountants in Ireland Institute of Chartered Accountants of Scotland Imperial Chemical Industries Ltd. Institute of Cost and Management Accountants Institute of Cost and Works Accountants Institute of Industrial Administration Institute of Municipal Treasurers and Accountants London School of Economics Multi-divisional format company Member of the Institute of Electrical Engineers Management Research Groups National Coal Board Production Engineering Return on capital advanced Return on capital employed Society of Incorporated Accountants and Auditors Taxation & Financial Resources Committee of the ICAEW The National Archives Urwick, Orr & Partners

Preface

In 1988 the two university colleges based in Cardiff, University College and the University of Wales Institute of Science and Technology (UWIST), merged. Soon afterwards, the Director of the Cardiff Business School, Roger Mansfield, arranged a meeting of members of his newly enlarged staff with an interest in things historical. Out of that meeting emerged the Business History Research Unit (subsequently Accounting & Business History Research Unit, ABHRU) which came to focus its research activities on various aspects of accounting history. As members of that group with an interest in the information that nineteenth-century business managers had at their disposal, we organised a conference in September 1989 on the theme of ‘Accounting and Business Decision-Making in Companies, 1844–1939’. Our plan was to generate a series of papers which could be pulled together into a book. This proposal was turned down by Routledge, but passed on to the fi rm’s Journals Editor. Beverley Stern (later Freegood) was keen to expand Routledge’s portfolio of business journals, and she invited us to submit a proposal for a history journal. This proved successful, and Accounting, Business & Financial History (ABFH) was launched in October 1990. Over the next 20 years we edited 58 editions and continued our own archival-based research into management accounting, working with some excellent colleagues both within and beyond the Business School. ABHRU provided a mechanism through which our research and that of other members of the group was subjected to comment and positive criticism. The ‘one-off ’ conference is now in its 23rd year, with the most recent assembly having taken place in Cardiff on 12–13 September 2011. The mid-noughties seemed to be a good time to reflect on what we had discovered through our joint research efforts over the previous 15 or so years, and to see how our fi ndings fitted in with the research of the growing band of accounting historians interested in the history of cost calculation and management accounting in Britain. Our fi rst attempt appeared as a chapter written for Chapman, Hopwood and Shields’ Handbook of Management Accounting Research (2007). In a single chapter we were naturally unable to go into as much depth as we would have liked on certain

xiv Preface issues. Nor indeed to cover the time-span we considered appropriate. We decided that a longer work was needed if we were to give full expression to our views and to the results of research carried out since the late 1980s, not all of which had appeared in published form. There were other reasons why we wished to write this book. Published, refereed articles have dominated accounting history’s historiographic outputs in recent decades. In Britain, the principal reason for this bias has been the series of research assessment exercises (RAEs), fi rst mounted under Margaret Thatcher’s government in 1986, whose purpose has been ‘to evaluate the quality of research in UK higher education institutions’ (http://www.hefce.ac.uk/research/ref/reform/). The evaluation is then used to enable the higher education funding bodies to distribute public funds for future research. For accountancy and other business subjects, it is the refereed article that is consistently listed first among the eligible outputs capable of indicating ‘quality’. The universities’ administrative leaders and heads of department therefore encourage accounting faculty to focus on refereed articles and to make every effort to secure publication in the highest-ranked journals. For the purpose of planning their career development, it is the Association of Business Schools Academic Journal Quality Guide that must be the accounting researcher’s bible. It is possible that the fi nancial focus on research has helped to raise overall quality; it has certainly privileged the research paper published in highly ranked journals. Does this effective bias against other publication outlets matter to accounting historians? We think that there are two sources of evidence to suggest that the implied inferiority of books does matter. First, the results reported by Carmona (2006) indicate the importance of books for the dissemination of knowledge in the domain of accounting history. His study of citation frequencies in the accounting history literature during the 1990s revealed that journal articles received 3,724 citations or 21% of the total compared with other sources of accounting history literature, mainly books and research monographs, which received 13,985 citations or 79% of the total. Carmona (2006: 266) further reveals that 11 out of the 27 ‘most influential works’ were published as books. He concludes, ‘Taken together, these results provide some support for the notion that books and research monographs constitute key venues for the dissemination of accounting knowledge’ (Carmona 2006: 265). Second, and significantly, the fi rst listed output in the RAE guidance notes for history departments was ‘authored books’. Consistent with this, within university history departments in Britain it is the book rather than the portfolio of articles that is often seen as the route to promotion because it reflects not just perseverance but a greater commitment to the sustained scholarship required to attempt a defi nitive treatment of a particular issue. A relevant book also becomes, as Carmona (2006) demonstrates, the natural source of initial reference for researchers working on a new area. Parker (1999) also makes the case for book-length accounting history publications

Preface xv when calling for a ‘return to the “grand tour” literary narrative’ capable of ‘offering a longer term, broader scope macro-scope view of the past’ (Parker 1999: 24). This book provides our interpretation of the development of management accounting since the late Middle Ages based on our own work and that of many other accounting researchers. The book is designed to be of interest to researchers, teachers and students from a number of different fields (not just accounting history but also business history, economic history and social history, to mention just three), and of use to future generations enquiring into its subject matter. We will be pleased if it is read by accountants and other business people who, as a result, might better understand the nature, potential and limitations of the accounting practices which they currently employ. We recognise that not everyone will agree with our views and interpretations, but it is to be hoped that all who read this work will fi nd something of interest. We owe a debt to many people who have worked with us over the years, most notably Malcolm Anderson, Mark Matthews and Marc Nikitin. We are also grateful to other co-authors with whom one or both of us have collaborated on issues involving cost calculation and management accounting, namely Colin Baber, Nicolas Berland, Frank Clarke, Graeme Dean, Clive Emmanuel, George Hammersley, Derek Matthews, Edmund Newell, Judith Wale and Henri Zimnovitch. We would like to thank the commissioning editor for Routledge books, Terence Clague, for his support and advice, and for his patience! Last, but certainly not least, we express our deepest thanks to our two ‘accounting history’ widows, Rosemary and Sandie, for their support and forbearance over many years. Trevor Boyns John Richard Edwards Cardiff, December 2011

Acknowledgments

We are grateful to the following for permission to reproduce previously published material: Academy of Accounting Historians for extracts from Edwards, J.R., Hammersley, G. and Newell, E. (1990) ‘Cost accounting at Keswick, England, c.1598–1615: the German connection’, Accounting Historians Journal 17(1): 61–80, and from Edwards, J.R. (2011b) ‘Accounting on English landed estates during the agricultural revolution—a textbook perspective’, Accounting Historians Journal 38(2): 1–45; Routledge Journals for extracts from Edwards, J.R. (1989) ‘Industrial cost accounting development in Britain to 1830: a review article’, Accounting and Business Research 19(76): 305–317; Elsevier for extracts from Edwards, J.R., Dean, G. and Clarke, F. (2009) ‘Merchants’ accounts, performance assessment and decision making in mercantilist Britain’, Accounting, Organizations and Society 34(5): 551–570. We are grateful to the following for comments on certain chapters in Part II: Peter W. King; David Oldroyd; Robert H. Parker.

Part I

Structure and Methodology

1

Introduction

This chapter commences with an explanation of the title and focus of this work. Next, we introduce our methodological approach (amplified in Chapter 2) and then explain the structuring of the historical evidence presented in Chapters 3–9. The issue of the relationship between management accounting theory and practice is then discussed followed by a review of the potential and problems of archival-based historical studies. This introductory chapter concludes with a review of the changing economic and social structure of British society during the time-span of this book.

1. TITLE AND FOCUS Choosing a title has not been a simple task. Our initial working title was The History of Cost and Management Accounting in Britain. Acknowledging the personal character of any general history, it was eventually decided to replace ‘The’ with ‘A’. In writing the text, it also became apparent that the inclusion of both ‘cost’ and ‘management’ accounting in the title was not without its complications. Since one of the issues central to the historical narrative set out below is the meanings of various terms and how these have changed over time, we ultimately opted for ‘management accounting’ as a generic term to encompass the provision of accounting information for management purposes. Certainly, in modern terms, any distinction that previously existed has become blurred. Many modern texts, on both sides of the Atlantic, see ‘management accounting’ as either incorporating or synonymous with ‘cost accounting’. Indeed, Drury (2008: 19) states, ‘It is apparent from an examination of the literature that the distinction between cost accounting and management accounting is extremely vague’, and he does not attempt to distinguish between the two terms in his work. Although separate defi nitions of the two terms are provided by authors such as Horngren, Datar and Foster (2003), it is difficult to see quite where they draw the line. Thus ‘Management accounting measures and reports fi nancial and nonfi nancial information that helps managers make decisions to fulfill the goals of an organization’ (Horngren, Datar and Foster 2003:

2

A History of Management Accounting

2), while cost accounting is described as measuring and reporting ‘fi nancial and nonfi nancial information relating to the cost of acquiring or utilizing resources in an organization’ (Horngren, Datar and Foster 2003: 3). There is an implication that ‘management accounting’ could be a broader term that encapsulates ‘cost accounting’, and this is the manner in which we have employed the term in our title. Thus, we do not exclude ‘cost accounting’ from our deliberations; indeed the modern conception of ‘cost accounting’ will form a major part of the narrative. A second reason for excluding ‘cost accounting’ from the title is that use of the term in the contemporary literature is associated, in Britain, with the twentieth century (see Chapter 8). Since it is our underlying thesis that accounting information, whether related to costs or otherwise, has, together with non-accounting information, been employed in British businesses for many centuries, use of the term ‘cost accounting’ outside of that period would not be appropriate. To avoid this problem, we have, except where attempting to deal specifically with the issue of the changing use and meaning of terms, utilised the more neutral term ‘cost calculation’. Given these concerns, how do we interpret use of the term ‘management accounting’ as a catch-all term for describing the subject matter dealt with in this work? Our answer is the following broad-based defi nition which we have adopted, namely that management accounting is the use of accounting information for the purpose of assisting management in carrying out its numerous functions. We see this defi nition as largely consistent with modern, widely accepted defi nitions of the term such as that of Horngren, Datar and Foster noted above, and we do not have the same qualms about applying it to time periods before the use of the term became commonplace in the Englishspeaking world (namely c.19501) as we do with the phrase ‘cost accounting’. Although writers on management accounting since 1950 may have provided their own defi nitions of the term, all of them emphasise the use of accounting information for managerial purposes. Since accounting information is shown to have been used in this way for many centuries, to talk about practices employed in the sixteenth century, for example, as management accounting does not constitute an historical disservice, even though the term did not exist at that time. Our use of the term is therefore intended to reflect a broad concept, namely the use of accounting information for managerial purposes, rather than the use of any specific set of techniques or any specific body of knowledge. This work focuses on the history of management accounting in Britain and examines the changes that have taken place since the late Middle Ages. This is an ambitious endeavour and leaves no space for in-depth comparisons between the British experience and those of other countries. It would of course be interesting to engage fully with analyses of the historical

Introduction

3

development based on events in other countries, not least the USA, because we believe there are important differences between the experience of Britain and the USA over the nineteenth and twentieth centuries. The US-oriented Relevance Lost, authored by Johnson and Kaplan (1987), is one work that should not be ignored (see, for example, Loft 1995), however, both because of the level of attention it has attracted and because it includes a comparison between the USA and the UK historical experiences (Johnson and Kaplan 1987: 141–144). In our view, the foundation for their depiction of the UK scene is somewhat limited and Chandlerian in approach and, as shown in the chapters below (esp. Chapters 9 and 10), based on sources whose conclusions can no longer be substantiated in the light of historical work carried out over the last 25 years. We do not see everything that has happened in Britain, especially in the twentieth century, in terms of an exercise in playing catch-up with the USA. Post-Edwards (1937) and post-Solomons (1952a), most general studies of the history of accounting (e.g., Garner 1954; Chatfield 1977; Wells 1978; Johnson and Kaplan 1987) have been written by Americans. Reflecting the economic, political and military pre-eminence of the USA during much of the twentieth century, most of these histories argue that, since 1900, the USA has led the way while other countries have followed with varying degrees of time-lag. The idea that, in the twentieth century, the USA has dominated in terms of management accounting developments, and that new techniques and approaches were introduced fi rst into US fi rms and in a much more widespread manner than in Britain, is a conclusion which is now difficult to substantiate, not least because of the small number of archival studies of US fi rms. This, as we shall see, is in marked contrast to the amount of archival-based research into the management accounting practices of British fi rms. Reviewing such studies, our thesis is that developments in Britain were substantially different from those experienced in the USA, and we draw important divergences to your attention to help understand better some of the thinking behind the history of management accounting in Britain that we present.

2. METHODOLOGICAL APPROACH A full discussion of methodological issues surrounding the concept of change in management accounting is presented in Chapter 2. Here, however, it is relevant to say a few brief words to explain our theoretical standpoint. Among the various schools of accounting history identified by Loft (1995), that which corresponds closest to our approach is the neoclassical rationalist school which places an emphasis on economic explanations for the changes that have occurred within the accounting systems of profitseeking fi rms. Possibly through the influence of the work of historians from other schools of thought, our position today might be better described as

4

A History of Management Accounting

‘new realist economic rationalism’. That is, while we emphasise economic forces as the major player in accounting change, we are sensitive to the fact that the nature of any change, and the course that it takes, may well be also influenced by non-economic factors. Furthermore, while our focus is on changes that apply at the level of individual businesses, we recognise that wider forces, such as that of the professionalisation of management accounting in the twentieth century, can influence change at the macroeconomic level (see Chapter 8). ‘New realist economic rationalism’ therefore allows for other forces, including social, institutional, contextual, and so on to influence and possibly mitigate or change the course of developments that have, at their heart, an economic cause, namely the pursuit by a business of greater efficiency and higher profits than would otherwise be achieved.2 This is not to argue that change necessarily results in enhanced levels of profit either compared with previous periods or with what would have materialised if the change had not been implemented. A new management accounting technique may be utilised in the belief that efficiency and profitability will improve, but this does not mean that those aspirations will be fulfilled.

3. STRUCTURE AND CONTENT Our concern is with how accounting information has been used historically to help inform managerial decision making. Long before the emergence of the large multinational enterprise, the individual proprietor and other relatively small-scale business organizations were engaged in various types of economic activity as, indeed, they are today. Such organizations, whether engaged in agricultural activities, trade and commerce, manufacturing, wholesaling or retailing have to be managed in some manner or another. To survive over the long term, such organizations need to maintain a positive cash flow, and this requires someone, or some group, to oversee and direct their affairs. Those in positions of responsibility clearly need to know specific details relating to the business conducted by the organization in the endeavour to ensure long-term survival. Insofar as these details are supplied by some form of accounting information, that organization is practising management accounting. Such a line of reasoning implies, of course, that management accounting was probably conducted on this planet from the time when social groups began to exchange goods and services. To be able to justify such an argument requires relevant evidence, and this does not exist in any substantive detail in Britain before the advent of modern writing and, indeed in many respects, modern printing. Written manuscripts and printed works increasingly become available from the late Middle Ages and, for this reason, our investigation begins there. Study of the historical evidence is divided into two time periods. Part II focuses on the late Middle Ages through to the beginning of the Industrial

Introduction

5

Revolution in Britain, c.1760. Three locales for the use of accounting information are examined: on landed estates where agriculture was the dominant form of economic activity (Chapter 3); in mercantile trade (Chapter 4); and in organizations engaged in manufacturing activity (Chapter 5). Naturally there is a degree of overlap between these chapters. For example, Chapter 3 pays some attention to business activities on manorial and monastic estates, although the main focus of management accounting developments in mining and manufacturing is the subject of Chapter 5. Part III focuses on changes that occurred between c.1760 and c.1970. In large measure our approach here is chronological, dividing the period into three phases: c.1760–c.1870; c.1870–c.1918; and c.1918–c.1970. Whereas a single chapter is devoted to the fi rst two periods (Chapters 6 and 7), the last period is the subject of two chapters. This is because it is important to address the issue of professionalisation and its impact on management accounting. Thus the study of professionalisation in Chapter 8 provides an important contextual background to the management accounting developments discussed in Chapter 9. Whereas the start date for our study has, to a large extent, been determined by the availability of relevant documentary sources, the same cannot be said for our choice of end-date. It is usual, and probably reasonable, to select a cut-off date which leaves an interval prior to the time of writing which is sufficient to provide historical perspective and to improve the likelihood of events and developments being viewed in an objective manner. This leaves the question of how long the interval needs to be, and a timespan that might be appropriate for one type of historical inquiry could be too long for another. A cut-off date that ruled out any type of accounting research into the post-1970 period would clearly be preposterous. Indeed, as editors of Accounting, Business & Financial History we encouraged studies of accounting’s recent past. It was not enough for a study merely to be located in the past of course; our main criterion for potential publication was that the manuscript should make a meaningful contribution to accounting historiography. Recent studies at the micro level, for example of the accounting practices of a particular entity, are usually a more feasible proposition than one which attempts to examine broad trends in the development of the accounting discipline. Ending a story of the history of management accounting 40 years or so prior to publication date is not without precedent. Writers on the history of cost calculation such as Edwards (1937), Solomons (1952a) and Garner (1954) chose not to deal with the last few decades prior to the time of writing. Edwards (1937: 344) justified the termination of his study in the early years of the twentieth century by arguing that threading his way through the literature on costing up to the time of writing would be a ‘formidable task and little would be gained’, not least because, in his view, cost accountants had not added much to ‘the theory of their subject’ in the previous thirty years. The work of Solomons (1952a) contains few references to

6

A History of Management Accounting

works published after 1925, while Garner (1954: x) justified the decision to end his study in 1925 on three grounds: (1) there had been ‘very few contributions of an original nature . . . after 1925’; (2) since the First World War there had been less attention ‘devoted to actual costing and more to the advanced theories’, with the early 1920s therefore representing a ‘temporary climactic stage’; and (3) the difficulty of evaluating carefully, and placing in historical perspective, all current discussions. The justification for ending our study c.1970 is rather different. It cannot be argued, nor do we believe, that there have been no significant developments in management accounting during the period since 1970. Our reason for not studying the changes that have taken place since then, and especially since the mid-to-late 1980s, is that they have been so great that to try to detail them and do them justice in this work would have been impossible. Indeed, developments of the last 40 years probably represent something of a sea-change in accounting, and thus deserve a separate work of their own. While we may not agree with the assessment of Fleischman (2009: 214) that there ‘can be little doubt that contemporary management accounting is probably more discontinuous from its past than at any other time in its long history’, we accept that the rapid development of computer and information technology during the last 40 years or so has made things possible that were previously impossible. This, together with the fact that accounting historians have yet paid little attention to management accounting developments over the last 40 years, makes 1970 a logical and justifiable endpoint for our own study. Future historians will hopefully pick up the story from that date as well as challenging, revising and extending our contribution.

4. THEORY AND PRACTICE The year that serves as the end date for our study witnessed the American Accounting Association appointing a committee which offered the following well-known, and sometimes heavily criticised (Miller and O’Leary 1987; Funnell 1996: 53), defi nition of accounting history: ‘the study of the evolution in accounting thought, practices and institutions in response to changes in the environment and societal needs’ (AAA 1970: 53). The role of accounting institutions features prominently only in Chapter 8 of this book, but all the other chapters in Parts II and III of this work focus on both accounting thought, as reflected in the available literature, and on accounting practice. Of course, we endeavour to go beyond a mere recital of ideas and practices to include consideration of when, how and why these variables changed over time. We also give some attention to the relationship between theory and practice, which is an issue that too rarely surfaces in accounting historiography. Solomons (1952a) suggests that the relationship between literature and practice has changed from time to time with sometimes one leading and

Introduction

7

sometimes the other. In the mid-nineteenth century, Solomons (1952a: 16–17) suggests that English costing practice may once again have ‘run ahead of theory’, while during the ‘costing renaissance’ post-1870, though there was a burgeoning of the literature (see Chapter 7), no really new ideas were discussed. However, in the view of Solomons (1952a: 52), ideas which had already been discussed in the prior literature were increasingly implemented in the practices of firms between 1910 and the early 1950s, so that practice began to catch up with theory. Garner (1954: 341) has suggested that only limited interest was shown in ‘cost theories and practices before 1885’, but introduces an international/comparative dimension when suggesting that, between then and 1900, English cost accountants were more important in developing original ideas and procedures. Thereafter ‘American theorists and practitioners’ forged ahead, never to be caught by their British counterparts. Garner (1954: 342) also provides an explanation for this dichotomy which resonates with the Chandlerian thesis of US organizational supremacy (Chandler 1977, 1990): ‘Cost theories and techniques . . . evolved as a product of their industrial environment, and their rapid development has been necessitated by the continually increasing complexity of manufacturing processes’. Many writers on management accounting developments in the twentieth century (e.g., Parker 1969) suggest that the subject matter became more theoretised, with academics, including economists, playing an increasingly important role. The link between theory and practice is never simple, however, since the derivation of theories can be based on observations of practice as well as the result of original thinking. Indeed, the more the latter predominates over the former, the greater the chance of theory becoming more an intellectual pursuit in its own right and of less and less relevance to practice. Thus Otley (1983: 5; emphasis in original) lamented that, in the 1960s, ‘[management accounting t]heory had not just run ahead of practice, it had run away from practice’. While he applauded the growing role of economists through the development of cost-volume-profit analysis and the use of discounted cash flow (DCF) methods of investment appraisal in the 1950s and 1960s (Otley 1983: 2), he also noted the ‘lack of practitioner involvement’ in developments such as quantitative techniques, suggesting that these had been ‘taken over by operational researchers and so-called management scientists’ (1983: 4). To improve our understanding of the changing relationship, over time, between accounting theory and practice, we will of course examine both the relevant literature and what is known about accounting practice based on the work of the academic tribe of accounting historians (Walker 2009) as well as researchers from other disciplines including economics and sociology. It will also be shown that archival-based research carried out in recent decades makes it possible to correct some of the errors of both fact and interpretation inherent in the works of those who wrote their histories of accounting prior to this time, and those who continue to rely on, or simply repeat, fi ndings presented in those early general studies.

8

A History of Management Accounting

5. ARCHIVAL-BASED STUDIES: POTENTIAL AND PROBLEMS According to Scapens (2006: 7) modern researchers in management accounting should aim ‘to understand the nature of management accounting practices, rather than comparing them with the conventional prescriptions of economic theory’. 3 Scapens (2006: 10) emphasises the need to understand ‘why specific organisations have their particular management accounting practices’ and this requires a ‘process-oriented’ approach based on ‘longitudinal case studies to understand how management accounting practices evolve’. In essence, accounting systems should be seen in their organizational context rather than assessed on the basis of whether they conform to some kind of theoretical ideal. It is not a question of whether an entity’s management accounting system embraces the most up-to-date ideas and practices but whether it meets organizational needs. Archivalbased research undertaken by accounting historians has increasingly been of that genre. Archival-based research usually, though not entirely, focuses upon longitudinal case studies of individual fi rms or of a small number of fi rms in a particular sector. In this way evidence is provided concerning the practices utilised, when changes in these practices occurred and, in some cases, is also utilised to explain why change took place. Examining this last issue is always the most problematic since, while the change and its nature may be well documented, the rationale for such change often has to be pieced together by the historian from indirect information. This inevitably leads to some degree of speculation, and historians from different theoretical backgrounds viewing the same evidence may come up with quite different explanations (Chapter 2). This, of course, is the essence of historical debate. No one historian’s view is necessarily better or more correct than any other, since it may never be possible to know the precise set of reasons underlying the change, or the forces that influence whether it sticks and achieves whatever goal or goals those instigating it hoped to accomplish. Many difficulties are of course encountered in conducting historical research (Fleischman and Tyson 2003; Napier 2009), among which are two that are particularly pertinent to this study. First, there is the issue of the reliability of the written evidence and, second, there is the problem of the coverage of the available material. Research into the history of accounting during the period covered by this study relies mainly, but not entirely,4 on written evidence. Whether this is in the form of archival records, or takes the shape of published texts and articles, the narrative has to be constructed mainly on the basis of what has been written down. There are a number of problems with such reliance, not least whether or not one can trust what has been recorded or printed. Even where the evidence can be relied upon, there is a potential problem with the terms used. As shown in Chapter 8 in particular, the use of words and terms in management accounting, and the meanings that have been

Introduction

9

associated with them, have rarely remained static over long periods of time. Furthermore, whereas some terms may have been used by one individual in a very specific manner, others may have used them in a more general sense. In the latter case the question arises whether or not the two different individuals who used the same term, meant the same thing. The significance of terms used can be especially problematic when it comes to deciding whether or not a particular technique or practice, with which we would associate the term today (or even then), was employed in that manner by a business whose archival records are under investigation. If the records of the business state that, for example, budgetary control was in use, can such information be taken at face value? Has the person recording this signal of accounting practice done so correctly? Has the person who stated that budgetary control was in use got his (or her) facts straight? Would they know what most people meant by the term budgetary control even at the time they used it? For example, would they understand the difference between the drawing up of budgets to plan future developments and their use for purposes of control? An historian who is trying to build up a picture of the use of a specific technique may be forced to rely on written statements, without always being able to test their veracity. In some cases there may be supporting archival documentation which clearly indicates that a technique was or was not used, but not in other cases. The historian also needs to be alert to the converse possibility. Through unfamiliarity with the terminology, or an unwillingness to use it, no mention may be found of a technique in the surviving written evidence, but the accounting records may indicate that it was indeed being practised. Terminological issues also feature in how we craft our story of course, and we again draw attention to the fact that some of the words used to identify or describe what was happening at a particular point in time in accounting’s past were not necessarily in use at that time. Use of modern terms is sometimes unavoidable if the writer is to communicate to a readership in terms that he or she will understand. For example, the term double entry bookkeeping (DEB) seems to have been developed in the seventeenth century but has been widely used by accounting historians to describe the accounting technique developed in Italian City States from the thirteenth century onwards. More fundamentally, we make heavy use of the term management accounting in this text although Scapens (1985: 7–8) observed that ‘general use of the term management accounting (and its North American equivalent, managerial accounting) is comparatively new’. It is also the case that the meaning of words may have altered over time. For example, the term accounting is used today used to signify ‘the preparation and communication to users of fi nancial and economic information’ (Parker 1992: 4). In earlier times the term accounting was synonymous with that of bookkeeping, now employed to signal a lower level skill defi ned as the ‘systematic recording of fi nancial and economic transactions and other events’ (Parker 1992: 39). It is therefore important to be aware

10

A History of Management Accounting

of the possibility of difference between the sound of a word (the ‘signifier’) and the thought behind the word (the ‘signified’), each of which can change over time (Parker 1994: 70). The second problem of particular significance where one is trying to gain an overall picture of the use of a particular technique concerns whether relevant records have survived. It is well known that there is a survivor bias: the records of those businesses which have endured over a long period of time are more likely to be preserved than those of organizations which went out of business relatively quickly. In the absence of systematic surveys of how accounting was done at particular times in the past, our knowledge of patterns of usage of various techniques can only be built up through individual archival-based studies, but this obviously provides incomplete evidence of management accounting’s past. Since we do not know the overall pattern of usage, the extent of any bias cannot be known. One way of mitigating the problems associated with drawing general inferences from limited archival-based studies, of course, is to increase the number of such studies, and this has been happening over the last 20 or so years. Another way of trying to overcome the bias is to carry out some form of triangulation exercise with other sources of information, not least that contained in the published literature, be it written texts or articles in trade and professional journals. This work utilises both of these sources as a means of attempting to broaden and contextualise the results reported by historians who have conducted archival-based studies. Business archives not only suffer from a survivor bias, they are also deficient in the sense that the incidence of such records can be extremely patchy. For some historical periods the archival coverage may be extremely sparse, so that the available material provides only a very sketchy representation of events. Some periods, specific industries and certain issues may not be represented in the surviving archives, or may be heavily underrepresented, thereby creating gaps in our knowledge. Furthermore, those accounting records which have endured over several centuries tend to be in the form of robust bound ledgers or their equivalent. Other records which might have been commonplace, but not kept in bound volumes, are much less likely to have survived and, indeed, all trace of them might have been destroyed (McLean 1995). Thus the story that is narrated in the chapters below is inevitably incomplete, something which is more obviously a problem for the pre-1870 period for which archival resources are more limited and alternative sources of information, such as published texts and articles, are much less widely available. But this problem is not entirely absent from more recent periods. The moral is: just because information is unavailable, it should not automatically be assumed that nothing was happening. Thus, historians should neither be too ready to make grand generalisations about the use of a technique on the basis of a small number of examples of such use, nor to conclude that a technique was not used simply because no evidence of its use has yet been uncovered.

Introduction

11

6. ECONOMIC AND SOCIAL STRUCTURE This is a history of management accounting in Britain where the geographical area is the European island that encompasses England, Scotland and Wales. It is acknowledged that this is a convenient rather than historically precise terminology given that Scotland did not become part of the Kingdom of Great Britain until the Act of Union of 1707. Also, our geographical coverage of the history of Britain is inevitably patchy, being dictated by the extant knowledge of management accounting developments in that territory. Greatest emphasis is therefore placed on developments in England. Wales is best represented in Chapter 5, reflecting the importance of industrial developments in and around the Swansea Valley in the seventeenth and eighteenth centuries, while evidence relating to Wales’ nineteenth-century iron industry can be found in Chapter 6. Material relating to businesses operating in Scotland is scattered throughout Chapters 6, 7 and 9. Britain’s changing economic structure has created new activities for accounting and accountants to measure and report. The intensely agricultural character of fi fteenth-century Britain was followed by three centuries when the growth of trading activity, both nationally and internationally, helped transform Britain into one of the world’s leading economic powers. Britain was the fi rst country to experience an industrial revolution, and for a few decades during the nineteenth century it became the industrial hub that has been captioned the ‘workshop of the world’ (Chambers 1968). It was a period when British manufactured goods dominated world trade, being mass manufactured more efficiently and competitively than anywhere else. Post-1870, while experiencing the second industrial revolution (the technological revolution) in the years up to the First World War, Britain nevertheless began to suffer relative economic decline. Since then, in common with other mature economies, it has become less reliant on manufacturing and more dependent on services as a source of employment and as the motor for economic growth. Changes in the structure of the economy have been accompanied by important alterations in the class structure within society and the power that each class wields. In very broad terms, Britain was under the domination of the aristocracy through to the sixteenth century even though feudalism, by this time, was on the wane. As Stone (1965: 8) put it, ‘the peers formed at one and the same time the major component of the social élite, an élite of wealth, and a power élite’. But things were beginning to change. The 80 or so years leading up to the English Civil War saw the ‘rise of the gentry’ (Tawney 1941)5 which, as it acquired more wealth, also achieved a higher standing within society and began to challenge for power. The gentry’s characterisation as ‘a prosperous new class with enlarged estates run on novel commercial lines for the maximization of profits’, and one which ‘filled the benches of the House of Commons, but whose claims to political power commensurate with their economic resources was consistently blocked by the Crown’ is agreed to be

12

A History of Management Accounting

an over-simplification (Stone 1965: 11). However, the idea that the gentry acquired a higher proportion of national wealth and economic power beginning in the sixteenth century is widely accepted. The rapid growth of trade and industry subsequently provided opportunities for upward social and economic trajectory that could be exploited by groups beyond the peerage and the gentry. Within a generation, some merchants accumulated wealth that put them on a par, fi nancially, with much of the aristocracy. Many more were sufficiently successful to achieve modest measures of social recognition and authority within their rather narrower geographical spheres of influence. The capitalist/industrialist who made money from organising labour within the workplace (typically a factory or a mine) is a story of the eighteenth and nineteenth centuries which saw the emergence of the modern/class based society (Perkin 1969). In terms of the structure of society, an important further development has been the ‘rise of professional society’ post-1880: Not only was [the professional class] . . . to overtake the landed and capitalist elites in numbers, and importance; it was also to infi ltrate all the major institutions of the modern state and modern society, from the executive government to the private capitalist corporations, and eventually to take them over. (Perkin 1989: xii) These major changes in the composition of society are associated with accounting interactively. A part of Hopwood’s major contribution to the study of accounting was to insist that ‘we should see accounting as both shaped by, and shaping, wider social processes’ (Chapman, Cooper and Miller 2009: 2). His words emphasised the need for research to address more directly the interactive nature of the accounting craft by recognising not only how accounting might be shaped by its context but also how at least some aspects of that very same context might in turn be shaped by accounting itself. (Hopwood 1983: 298; see also Hopwood 1987; Burchell, Clubb and Hopwood 1985) It is a testament to Hopwood’s radicalisation of the accounting craft that serious efforts have been made to address this gap, and much of the critical work in the accounting history domain has focused on management accounting (Fleischman 2009; Napier 2009). It is not the purpose of this book to explore the broad interface between management accounting on the one hand and society on the other, although connections between people, accounting and business practices naturally feature prominently in this study. Close attention is paid to known individuals who sometimes developed and certainly operated management accounting practices, namely the agents, stewards, bookkeepers, accountants and writers who possessed the specialist expertise required to help landowners, merchants and industrialists manage more effectively their business affairs.

2

Theoretical and Explanatory Framework ‘[A]n understanding of accounting practice (as a form of social practice) can only be achieved by exploring the historical development of accounting and identifying the various influences on accounting change’. (Scapens and Roberts 1993: 2)

1. PURPOSE A history of management accounting in Britain must aim to provide much more than a chronology of who did what and when. It needs also to tackle the more important and more difficult questions of how and why did things change. Here the historical dynamics of management accounting must be addressed because what is done at one point in time is not the same as that done at an earlier or later date. This is a phenomenon that has received significant attention from accounting researchers in recent years, as demonstrated by two special issues of Management Accounting Research devoted to that theme (2001, vol. 12, no. 2 and 2007, vol. 18, no. 2). Change can be viewed from three main perspectives: the motivations for change; the process of change; and the consequences or outcomes of change. The perceived inspiration for accounting change depends upon the role that management accounting is believed to serve within organizational entities. Possible explanations include the fundamentals of labour process economics, the pursuit of disciplinary regimes and adaptation to better exploit market conditions. These competing theoretical paradigms are addressed in the next section of this chapter and our perspective is explained. Diverse explanations for the process of accounting change focus on issues such as continuity, stability, change, drift and discontinuity. These are examined in Section 3 and are followed by a review of the circumstances which both contribute to the need for change and make change a feasible proposition. Section 5 addresses organizational circumstances resistant to change, and our concluding remarks are then presented. Management accounting change can also be considered from numerous perspectives, not least the nature of the outcomes and whether these were considered to have been good or bad.

2. MOTIVATIONS FOR ACCOUNTING CHANGE Loft’s (1995) survey of the history of management accounting identifies four main approaches. First, there are the ‘traditional historians’ who are seen to

14

A History of Management Accounting

be preoccupied with treating accounting’s history as one of continuous evolution, technical elaboration and improvement towards its present state, based largely on a review of published materials (1995: 25). Her second group comprises neoclassical inspired historians who are judged to have revised and developed the findings of the traditional school. Although agreeing that such researchers bring more of the organizational context to their studies, neoclassicists are seen to share with traditionalists ‘a rather passive view of cost and management accounting as a set of techniques serving the goals of the organisation and . . . progressing in an evolutionary way, becoming constantly better over time’ (Loft 1995: 25; see also Napier 2001). The prior work of accounting historians of these genres, with the label ‘traditional’ often used to encompass both of them, had earlier been the subject of stinging criticism from Anthony Hopwood (1987; see also Miller and Napier 1993) in his seminal essay titled ‘The archaeology of accounting systems’. Hopwood (1987: 207; see also Hopwood 1983) argued that accounting historians had, up to his time of writing, adopted a mundane technical perspective ‘delineating the residues of the accounting past rather than more actively probing into the underlying processes and forces at work’. Hopwood (1987: abstract) encouraged, instead, examination of the dynamics of accounting over time through consideration of ‘the preconditions for such change, the process of change . . . [and] its organisational consequences’. Case studies are presented by Hopwood to demonstrate his ideas, through a focus on circumstances that succeeded in ‘putting accounting where accounting was not’ (1987: 214). These sentiments are echoed by Miller, Hopper and Laughlin (1991) in an editorial to a special issue of Accounting, Organizations and Society (1991, vol. 16, nos. 5–6), with the term ‘new accounting history’ used to describe the writings of the ‘critical accounting historians’ who were then beginning to put pen to paper. New accounting history studies are not confi ned to management accounting, of course, but this subset of accounting has, so far, provided the most promising material for academic debate between historians of diverse methodological persuasions. New accounting historians typically reject the prior focus of traditional historians on efficiency gains and profit maximisation and instead place the history of management accounting within very different frameworks. Among these frameworks, which in some respects differ more from each other than the paradigm they intend to supplant, are the Marxist labour-process framework, the Foucauldian power-knowledge approach, and that of the New Institutional Sociology. The labour process approach is predicated on the idea that organizational control systems are not neutral mechanisms for making production more efficient. Accounting systems are seen by Marxist historians (e.g., Armstrong 1985, 1987; Braverman 1974; Bryer 2000a, 2000b, 2005, 2006a, 2006b; Hopper and Armstrong 1991; Hopper, Storey and Willmott 1987) as a practical mechanism that aids management in its endeavour to control

Theoretical and Explanatory Framework

15

and exploit labour, on a day-to-day basis, so as to extract the surplus value required to create capitalist profits. Marxist historians therefore characterise the development of management accounting as a tool in the armoury of capitalists in the class struggle over the distribution of income and wealth. Fundamentally, however, Marxist historians do not challenge the idea that accounting is employed by management to increase ‘the size of the economic pie’, but they do aim to exploit the potential of Karl Marx’s theory for explaining ‘redistribution of the pieces’ of the pie (Luft 2007: 273). A second strand of the new accounting history draws on post-modern theory, especially the ideas of Michel Foucault and, in its treatment of management accounting, the principal focus is on providing explanations for how modern management accounting came into existence and thrived. Foucault did not directly address accounting matters in his major works, but his ideas have been applied in an imaginative manner drawing on the French philosopher’s concern with the central role in modern society played by techniques aimed at watching and controlling what individuals do. That is, the physical coercion (‘sovereign power’) of earlier societies is seen to be replaced by ‘disciplinary power . . . associated with the creation of individual performance measures and the rise of institutions devoted to the surveillance and control of individuals through observation and measurement of behavior’ (Luft 2007: 273). Foucauldians have, accordingly, attributed management accounting’s development to the need for managers of corporations to control and discipline workers by rendering actions visible and calculable (Loft 1986, 1990), typically through comparison with norms (e.g., Hoskin and Macve 1988, 1994; Miller and O’Leary 1987). Ironically, much of this work has involved the search for origins, namely Hoskin and Macve’s (1988) pursuit of ‘the genesis of accountability’,1 so despised by some advocates of new accounting history. Thus, Hopper and Armstrong (1991: 405) have expressed concern that ‘Traditional management accounting history has been fixated on a search for origins, on the questions of who did what first, and when’ (see also Miller and Napier 1993). Indeed, a notable feature of the analysis of Hoskin and Macve (2000) of the research findings of neoclassical historians has been to demonstrate complementarity rather than conflict, most significantly their view that revelations concerning British management accounting practices in the nineteenth century support, chronologically, their own thesis.2 Another framework which has been used in accounting research for some time and which has recently come to be used in accounting history, most particularly at the level of the state (Gomes, Carnegie and Rodrigues 2008: 1152) or state–business relationships (Noguchi and Boyns, 2012), is New Institutional Sociology (NIS) or, as it is sometimes known, new institutional theory. NIS (Meyer and Rowan 1977; DiMaggio, 1988; DiMaggio and Powell 1991; Scott 2001) focuses on the ability of accounting to legitimise the existence of organizations and their activities through the construction of appearances of rationality and efficiency. NIS rejects

16

A History of Management Accounting

rational-actor models, and is sceptical of technical reasons used to justify the adoption and maintenance of practices or procedures since these mask the impact of political and cultural factors (Gomes, Carnegie and Rodrigues 2008: 1149). NIS is motivated by a theoretical focus on ‘the construction and functioning of knowledge and rule systems (such as budgets) in organizations’, but the theory ‘tells little of how new practices unfold, how they gradually become institutionalised, and how, if at all, they displace previous practices’ (Ezzamel et al. 2007: 14). A key feature of NIS is that organizations are seen as open systems which continuously change, generating innovations in terms of goals, practices and structures in order to adapt themselves to the changing environments that they face. Among the environmental factors which influence such organizations and the changes they undertake are cultural values, economic conditions and the legal/political context. According to DiMaggio and Powell (1983: 147), over time structural change in organizations seems less and less driven by competition or by the need for efficiency. Instead . . . bureaucratization and other forms of organizational change occur as the result of processes that make organizations more similar without necessarily making them more efficient. Constrained by the process of homogenisation, organizations seek political power and institutional legitimacy as much as they compete for resources and customers (DiMaggio and Powell 1983: 148–150). The process that constrains organizations is known as isomorphism, and can be generated in three ways, namely through coercive, mimetic and normative pressures. The homogenisation caused by these processes allows organizations within society to interact with each other more easily and to build legitimacy. As generally recognised, this typology is an analytic one and thus not always empirically distinct (DiMaggio and Powell 1983: 150). Under NIS, if institutional change is to occur, it is anticipated that key institutional actors will play an important role in shaping the substance of change (Gomes, Carnegie and Rodrigues 2008: 1150; Beckett 1999: 778; DiMaggio and Powell 1991: 27). Indeed, the existence of an institution is seen as the ‘outcome of a contest between those who want it and those who do not’ (DiMaggio 1988: 12). The key institutional actors, referred to as institutional entrepreneurship (DiMaggio 1988: 14), ‘serve as agents of legitimacy supporting the creation of institutions that they deem to be appropriate and aligned with their interests’ (Dacin, Goodstein and Scott 2002: 47). According to Gomes, Carnegie and Rodrigues (2008: 1150), the power and position of institutional entrepreneurship are important when analysing the process of institutional change because ‘what becomes institutionalized will depend on the power of the organizational actors who support, oppose, or even struggle to influence it’.

Theoretical and Explanatory Framework

17

The introduction over the last couple of decades of new approaches to studying the history of accounting, such as those above, has extended significantly the range of scholarship applied to the debate about accounting’s past, particularly in the area of management accounting. The appearance of so-called ‘critical’ scholars in the late 1980s and early 1990s, presenting their ideas in a vigorous and creative manner, resulted in clashes both between themselves and neoclassical accounting historians (Fleischman and Radcliffe 2005). In the mid-1990s, however, there was a reaction against what threatened to become an internecine methodological debate (Fleischman, Kalbers and Parker 1996; Funnell 1996). While demonstrating the differences between the traditional and new accounting historians, Funnell (1996) also indicated how their approaches complemented and added value to our understanding of accounting change through the interpretation of events in different ways. Funnell (1996; see also Boyns and Edwards 2000; Fleischman and Parker 1997, Chapter 9) therefore argued the case against polarisation among accounting historians and in favour of tolerance. While the last 15 years has seen a continued exchange of views and ideas, 3 it has also witnessed historians from differing methodological standpoints collaborating to examine the effect of applying their distinctive lenses to interpret the significance of archival material jointly studied (e.g., Bryer, Fleischman and Macve 2007; Fleischman, Hoskin and Macve 1995; Fleischman and Macve 2002; Fleischman and Toms 2009). It has also seen individuals apply more than one paradigm to the analysis of research evidence (e.g., Oldroyd 1999). The next sub-section outlines the theoretical approach adopted in writing this book.

2.1. An Efficiency ‘Inclined’ Paradigm It is not claimed that we are able to identify precisely what happened in the past but, in the Rankean tradition, our study is predicated on a ‘knowledge of primary sources and the ability to critique the sources on technical grounds, resolve confl icts, and make a reasonable determination of “what actually happened”’ (Luft 2007: 270). And as Napier (2002: 136) put it, the concern is to assemble evidence which is sufficient to enable ‘justified statements about the past’. In addition, we move beyond a pure narration of past events: fi rst, by selecting relevant material from that which is available; second, by locating the evidence within its appropriate context; third, by placing fi ndings within a theoretical framework which assumes the pursuit of efficiency gains but which acknowledges the role of both contingent variables and the existence of organizational resistance to change. In doing so both individuals and social phenomena are focused upon in the form of business organizations and collectives (e.g., professional bodies and trade associations) established to further the interests of their members. It is not argued that this study off ers ‘an

18 A History of Management Accounting objective truth about that past’, but our intention is to avoid the accusation of ‘reading historical sources in a naively presentist way’ (Luft 2007: 277–278). Neither does our history adopt the teleological approach which assumes that the past contributes to an unbroken chain of events stretching through to the present day. Nevertheless, the present is, perhaps inevitably, sometimes used as a reference point to help understand the nature and significance of the issue under discussion. This might be solely a linguistic matter, for example, the term marginal cost was not used until relatively recently, but the concept which the term marginal cost conveys today was understood by some businessmen centuries ago. Hence it is judged to be both helpful and meaningful to use a term which did not exist at the time to identify, discuss and analyse earlier practices, even though we are aware that not all of the modern day connotations surrounding the term would necessarily have been understood in earlier times. In presenting our history, a purely ‘economic rationalist’ approach is not adopted because, although we are comfortable with being located within Loft’s (1995) ‘neoclassical revisionist’ school, we do not consider economic variables as the only factors that influence the adoption of particular modes of accounting at specific points in time or space. Businessmen and women4 are not seen here as atomistic profit maximisers even if control of costs became an essential fact of economic life for those businesses operating in a competitive environment (Boyns and Edwards 1995: 32). The fact that the socio-political and historical contexts of a period can significantly influence events and outcomes is fully acknowledged (Boyns, Edwards and Nikitin 1997: 5–6). This chapter does not debate the relative merits of our chosen explanatory framework compared with sociological, organizational or scientific approaches since it is our conviction that all alternative constructions of the past can contribute to understanding and that any attempt to persuade adherents to other paradigms of the primacy of our own approach is neither justified nor likely to prove productive. Despite employing an efficiency inclined explanatory paradigm, the story of management accounting’s history in Britain is not portrayed here as one of continuous progress. As one north Wales businessman described accounting and accounting change at his fi rm when interviewed by an academic researcher: Well it is, you see, how things evolve. I suppose in the academic world it’s all clear cut, but it isn’t really, you know. When you come down here, it’s all a hell of a big mish-mash, all inter-related influences. It’s not clear cut and logical. It looks completely illogical, but that’s how it happens. And I’m sure we’re no different from any other outfit. And you’ll go back and say ‘What a load of idiots!’ But that’s how it happens. (quoted in Scapens 2006: 10)

Theoretical and Explanatory Framework

19

Although fully aware of the fact that management accounting change often fails to deliver improvement, we nevertheless consider the pursuit of efficiency and additional profit as a means of short- or long-term survival to have been the dominant motivation, historically, for ownership-inspired change in business organizations.5 If those involved in running organizations are assumed to be rational, then cost-benefit analysis would suggest that a new management accounting practice would be adopted only if the benefits, actual or perceived, outweigh the costs, actual or perceived. A situation promising to yield a positive net benefit would therefore be seen as beneficial overall and the change adopted in the expectation that it would deliver improved efficiency and additional profit. In practice, if, for any reason, the net benefit does not materialise, then the change may be classified as ‘unsuccessful’. In such circumstances, adopting a rational expectations approach, one would expect management to be more wary of undertaking subsequent changes, for fear that they would also be unsuccessful. In practice, however, individuals running businesses often continue to seek the Holy Grail of efficiency/additional profit, and appear to be capable of being persuaded that, despite the lack of previous success, the next new scheme will be successful and beneficial to them and their organization! But perhaps this is not necessarily evidence of aberrant behaviour. A fundamental problem with trying to assess whether or not a change is an ‘improvement’ is how to measure the net gain or loss. Without a clear idea of what constitutes ‘improvement’, the classification of any particular change as enhancing or damaging a management accounting system is value-laden and, hence, highly problematic. Luft (2007) has criticised efficiency-based explanations by pointing to the lack of evidence that new management techniques were actually responsible for economic growth at the micro or macro level. Chandler (1977) and Johnson and Kaplan (1987), she continues, sometimes cite increases in profits at fi rms that employed the new techniques; but there is no attempt to determine how much of the profit increase was due to transaction-cost reductions and how much due to increased demand for the fi rm’s products, monopoly power in the market, changes in material input prices, wealth transfers from employees, economies of scale, or new production technology. (Luft 2007: 279) In this book, no attempt is made to measure the effect of changes in management accounting systems on business performance. In part this is because we are not sure whether this can be done effectively for changes occurring today, much less for events which sometimes took place in the very distant past. But measuring the impact of change is not our motivation in writing this work. The concern here is with attempting to explain the ‘How’ and ‘Why’ questions, namely the process of, and motivation for, change in management accounting practices. Process is considered next.

20 A History of Management Accounting 3. THE PROCESS OF ACCOUNTING CHANGE Our research into aspects of the history of cost and management accounting over the last quarter of a century has been largely archival based with longitudinal case studies the principal research methodology. Our aim has been to try to determine what happened and, wherever possible, to provide possible explanations for observed phenomena. In many of our case studies, due to the length of the time period examined, while change did occur, there was often a great deal of stability. In some cases, change was rapid and represented a radical shift in the approach adopted; in others, change was far less significant and, what did happen, took place slowly. Thus, in a number of our published research articles, especially those dealing with events during the 200-year period from the commencement of the British Industrial Revolution through to the 1960s, the historical record is portrayed as one of ‘continuity with change’ (Littleton and Zimmerman 1962: 245). We consider this explanatory framework to be useful for presenting the history of management accounting. In the remainder of this section we explain why, fi rst rehearsing key characterisations and features of management accounting change, and, second, examining our focus on ‘continuity with change’.

3.1. Shades of Accounting Change Terms such as continuity, stability, change, drift and discontinuity are used to describe the dynamics of historical change. Although these apparently distinctive terms are used to signify different ways of classifying episodes in history, interrelationships between them are manifest. Reflecting on the nature of accounting’s history, Littleton and Zimmerman interpret continuity as ‘elements from the past flowing into the present and through the present onward into the future’, whereas change ‘speaks of the effects of conditions current in one era which do or will modify continuity but not cancel it’ (Littleton and Zimmerman 1962: 245). For them, ‘It is clear that historical continuity has accompanied historical change. Some of the past justifiably persists; much more of the past does not continue unchanged’ (1962: 248). For the economic historian, Alexander Gerschenkron (1968: 12), the term continuity is used to signify ‘stability of certain elements in an otherwise changing world’. Again, it is unlikely that any of the terms listed at the start of this paragraph can be used to describe history per se. For example, changeless history [i.e. complete stability] is a contradiction in terms, and absence of change is just as destructive of history as would be a change that proceeded so constantly, so rapidly, and, most of all, so thoroughly as to leave no discernable relation between successive moments. (Gerschenkron 1968: 12)

Theoretical and Explanatory Framework

21

So it is fairly safe to say that change does take place, and that it will proceed at some rate between zero (historical stability) and infi nity (discontinuous or revolutionary change). The rate of change is of course a mathematical concept (see, e.g., Gerschenkron 1968 on measuring industrial change), but this is not an analytical tool we feel able to apply to a study of management accounting history. It can be said with a fair amount of confidence, however, that the pace at which management accounting has changed has not been uniform, with fairly lengthy periods of relative stability separated by periods of relatively rapid change (Littleton and Zimmerman 1969: 246). Particular shades of accounting change appeal to certain groups within the history community. At one extreme there are those committed to the idea that history should be seen as a series of discontinuities. For example, disciples of Michel Foucault believe that history is characterised by unevenness and discontinuity (Funnell 1996: 54). Towards the other extreme are historians who favour the view that change occurs in a slower, more evolutionary manner that retains continuity with earlier conditions and circumstances. For example, many economic historians now advocate the idea that Britain underwent an industrial evolution, rather than revolution, during the latter decades of the eighteenth and early decades of the nineteenth centuries (for a survey of the various views, see Mokyr 1999, 2004). In part, the way in which management accounting change is categorised may depend upon the level at which transformation occurs. In particular, the adoption of a new accounting technique by a single firm might represent significant accounting change at the organizational level without there being any discernible impact at the macroeconomic level. Therefore, what constitutes a material (even revolutionary) change in one context, for example the individual organization, does not do so in another, for example the economy, though widespread dissemination might in due course produce a significant impact nationally. For example, Hoskin and Macve (1986; see also Fleischman, Hoskin and Macve 1995) dismiss, as insignificant, accounting innovations revealed at fi rms in Britain such as Carron, Boulton and Watt and Wedgwood on the grounds that the changes made were not sustained over time or diff used more widely. It is for this reason that they seek the genesis of modern managerial accounting in the USA, where innovations at the Springfield Armory, during the second quarter of the nineteenth century, created a calculative regime based on human accountability that spread throughout the USA and assisted the development of modern managerialism and the creation of the modern business enterprise. Evolutionary and revolutionary change6 or, as some prefer, continuity and discontinuity, are useful, extreme, characterisations of change for analytical purposes. But change is, for many, a more complex issue. Scapens (2006: 19) explains how revolutionary changes in accounting imposed following a company takeover depended, for their success, on linking the desired changes ‘to the prevailing ways of thinking and doing (i.e. the prevailing institutions)’. Then, again, Giddens (1979, 1984) points out a natural interconnectedness

22

A History of Management Accounting

between change, stability and continuity. Stability, according to Giddens, ‘means continuity over time’ (Giddens 1979: 199) and it is this that ensures the connection between the past, the present and the future. For Granlund, stability and change can co-exist, while ‘continuity of accounting practices over time is a result of a large number of issues that take effect on various levels of organizational operations’ (Granlund 2001: 161). Quattrone and Hopper (2001: abstract) are new accounting historians who reflect on the meaning of ‘change’, and express concern with those who depict it as ‘the passage of an entity, whether an organization or accounting practices, from one identifiable and unique status to another’. Quattrone and Hopper instead suggest that the focus should be on ‘drift’. Not convinced by the modernist view that organizational space and time are unique and linear, they argue that it is difficult to defi ne change because ‘new systems give rise to multiple spaces and times within organizations’ (Quattrone and Hopper 2001: abstract). In particular, they contend that change cannot be judged as rational from a single perspective, but rather involves ‘multiple worlds in multiple spaces and times giving rise to polyrationality’ (Quattrone and Hopper 2001: 426). Analogies for drift in organizations cited by Quattrone and Hopper include castaways in a boat in the ocean or friends lost in a wood. ‘In organizational terms, drift recognizes the existence of some knowledge of what an organization is, where it is and where it should go . . . [but] possession of such knowledge does not transcend actions or outcomes to unknown destinations’ (Quattrone and Hopper 2001: 427). This concept of drift is clearly suited to the discussion of change in a single organization, but its implications, if any, for the development of ideas across organizations is less clear, though it seems likely that the two are not totally divorced from one another. Another way of approaching the issue of change, from an historical perspective, draws on the concept of path dependency (Nelson and Winter 1982). In practice there are two major variants of path dependency: ‘path as legacy’ and ‘path as punctuated equilibrium’. The former approach militates against the idea of change in favour of continuity, providing explanations for why particular paths are chosen and remain stable over time, while the latter gives rise to long periods of reproduction punctuated by brief periods of innovation which determine a new path. Under these two versions of path dependency, there is either stability or abrupt periods of change. As Djelic (2008) has pointed out, neither of these variants of path dependency allows for gradual or evolutionary change. For Djelic (2008: 551), an additional concept is needed to explain this type of change, that of ‘path generation’, which ‘refers to the creation of a new path or to a significant deviation from an existing path through the succession of small, sometimes apparently inconsequential steps, through the aggregation of multiple decision points and critical conjunctures’. An alternative approach to gradual change is offered by the diff usionist approach which, like path dependency, does not comprise a single view

Theoretical and Explanatory Framework

23

of developments. Heliocentric diff usionists take the view that innovations begin in a single location and are then extended to other geographical contexts over time. Evolutionary diff usionists, on the other hand, building on the ideas of cultural circles diff usionists, who believe in multiple origins, namely that all modern cultures have evolved from a small number of initially separate cultures rather than a single one, believe that all humans share psychological traits which make them equally likely to generate innovations, resulting in the development of similar innovations in isolation. The next section explains the concept of change underpinning our study of management accounting’s history in Britain.

3.2. ‘Continuity with Change’ in This Book A problem that arises in writing any general history is neatly summarised by Luft (2007: 276) when focussing on the history of management accounting: The more such stories are condensed (as in Johnson & Kaplan, 1987), the more it [sic.] can leave the casual reader with the impression that management accounting responded smoothly to environmental changes in the more distant past, meeting the information needs of management as those needs arose. This over-simplification of history can all too easily happen. It can happen when writing an article and, the broader the attempted coverage of the article, the more likely it is for over-simplification to occur. Many of us have been faced with complaints from editors that historical writings are ‘too long’. The problem is that the historian’s obligation to provide sufficient contextualisation, and possibly also theorisation, takes up much space. In this book, we will do our best to tell, if not a full story, then at least a balanced story, so far as the literature and the archives allow. The aim will be to enable the reader to appreciate the complexity of the nature and process of accounting change. This book is inevitably concerned with change at two levels: that of the individual business (the micro level) and that which impinges on the economy at large (the macro level). The two are, of course, inextricably linked. A change at one individual business may not be of any significance in the macro sense unless it acts as a precursor for similar changes throughout the economy. Similarly, macro-level changes cannot materialise unless change occurs at a significant number of individual businesses. This work, while using examples and evidence drawn from individual case studies conducted by ourselves and other historians, will try to build on them to reach conclusions concerning the dissemination of practices throughout the economy as a whole. This is not an easy task, since there are still many gaps in the historical record and there is a dearth of quantitative evidence relating to

24

A History of Management Accounting

the use of specific accounting techniques not just over time, but also at particular points in time and in many industrial sectors. Thus, while the ‘personal journey’ of Scapens (2006: 7) may have been from a research focus on exploring the diversity of practices in the population to one more concerned with understanding ‘how the management accounting practices of individual organisations emerge’, ours has been in rather the opposite direction: from studying change in individual businesses to considering the extent to which such changes were diff used throughout the economy. At the macro level, accounting change can be slow and uneven. While it may be claimed that a new method, for example an integrated cost and financial accounting system, would produce efficiency gains, and it may be introduced quickly in one or a small number of businesses, it might nevertheless be decades before the technique achieved significant diffusion, if at all. Whether unevenness occurred due to ignorance, organizational resistance, disagreement about whether the new method would produce the claimed efficiency gains, or something else, is often unclear but, at the individual business level, the decision to implement a new system might be reversed or simply allowed to lapse for many different reasons, including the actions of individuals. Thus, macro-level accounting change is inevitably the result of the decisions of micro-level individual business decision takers. While Chandler (1977, 1990) has seen the ‘new management accounting of the nineteenth and early twentieth centuries as the victory for men like Andrew Carnegie, Frederick Taylor, and Alfred Sloan over the problems of coordinating and controlling complex enterprises’ (Luft 2007: 276), we see it more as a Baxterian phenomenon where Obscure people, bent on improving their existing methods or meeting new needs, have continually made minor experiments. If an experiment failed, it was abandoned and forgotten; if it was a success, it was kept and in time copied in other firms. Accounting has thus grown by small steps, and is the creation of countless anonymous innovators. (Baxter 1981: 6) This approach, which is consistent with that of Djelic’s ‘path generation’ noted above, does not deny the possibility of someone such as Josiah Wedgwood ‘putting accounting where accounting was not’ (Hopwood 1987: 214), nor that the First World War may have had a dramatic and positive effect on companies’ costing procedures (Loft 1986, 1990). However, our more common experience is that management accounting practices which appear new, at fi rst sight, might take on a less revolutionary guise when researchers dig deeper into the archives and adopt a more longitudinal perspective. This observation is not presented as a critique of authors whose findings are subsequently the subject of challenge as, indeed, our own research outputs have been, and this work will no doubt be. In a new discipline such as accounting history it would be incredible, and worrying, if the fi ndings of

Theoretical and Explanatory Framework

25

researchers were not challenged, revised and sometimes completely overturned. New fi ndings and/or new interpretations of existing evidence raise new possibilities and as A.J.P. Taylor (1976: 17) put it: We know that our version, being set into words, is itself false. We are trying to stop something that never stays still. Once written, our version too will move. It will be challenged and revised. It will take on appearances that we did not expect. We are content to repeat the words with which Gayl fi nished his book on Napoleon: ‘History is an argument without end’. In the next section, we consider internal and external circumstances that give rise to the need for different management accounting practices and enable them to change over time to help achieve the objectives of increased efficiency and additional profit. For a different perspective on factors producing accounting change see Hopper and Armstrong (1991: 405) who argue that ‘accounting controls were not a consequence of economic or technological imperatives, but rather were rooted in struggles as fi rms attempted to control labour processes in various epochs of capitalistic development’. Insofar as such attempts were aimed at the pursuit of greater efficiency and larger profits, and hence national income, rather than simply trying to alter the relative shares of capital and labour, their approach is not totally inconsistent with that adopted in this work.

4. ACTIVATING MANAGEMENT ACCOUNTING CHANGE Actor network theory maps relations that are both material (between things) and semiotic (between concepts). It tries to explain how material– semiotic networks come together to act as a whole, while recognising that such networks are potentially transient, not intrinsically coherent, and may contain conflicts. Furthermore, the actants can be both human and nonhuman. It is not intended to utilise actor network theory per se in this work, but we do acknowledge the fact that the history of management accounting involves relationships between actants, including humans, and between concepts. We also recognise that the networks which may have existed in the past are not necessarily the same as those that exist today, and that where networks continued to exist over long periods there may have been significant developments in the character of those networks. Networks, and changes therein, can be an important source of dissemination of ideas and diff usion of practices, both at the level of the individual organization and in a broader sense. Attempts to introduce change within an organization inevitably invoke resistance from some quarters. While many theories have been put forward to explain the creation and management of change, most are underpinned

26

A History of Management Accounting

by Lewin’s three-stage theory developed in the 1940s/1950s (Burnes 2004; Kreitner, Kinicki and Buelens 1999: 588; Scott 2009). According to Hendry (1996: 624), ‘Scratch any account of creating and managing change and the idea that change is a three-stage process which necessarily begins with a process of unfreezing will not be far below the surface’. ‘Unfreezing’ forms the first of the three stages of Lewin’s model, indicating that if people are going to be motivated towards change, the current equilibrium or status quo must be unfrozen. The next two stages comprise: ‘moving’ to a new equilibrium by transforming what needs to be changed; and ‘refreezing’, making the new equilibrium permanent. Unfreezing is necessary in order to overcome the strains of individual resistance and group conformity and can be achieved in three ways: (1) increasing the forces driving change; (2) reducing the forces resisting change; (3) some combination of (1) and (2). Moving to a new equilibrium can also be encouraged in three ways: (1) persuading employees that the current status quo is not beneficial to them and encouraging them to explore new possibilities; (2) getting them to work together in a quest for new and relevant information; (3) connecting the group view to that of a well-respected, powerful leader or leaders who support(s) change. Refreezing is the fundamental imperative for successful change. Without it, there is the strong possibility that there may be a reversion to the previous status quo. Hence, it is vital that the new values generated are integrated into the community’s traditions and a balance achieved between the forces driving and resisting/ restraining change. If there is such a balance, then the new position will be in equilibrium since change only occurs when the strength of one set of forces (either driving change or resisting it) is greater than that of the other. Although not as all-embracing as social cognitive theory (see Bandura 1986) which recognises the potential impact of environmental influences, personal factors and attributes of the behaviour itself, Lewin’s theory does allow for the possible influence of key persons or groups, for example Yamey’s ‘actor’ (1981: 131) or Parker’s (1991) agent of change. For Busco, Quattrone, and Riccaboni (2007: 129), the key issue that has to be addressed by scholars is ‘to locate the agency prompting the whole process’ of management accounting change. Previous authors on the subject have suggested a wide range of such possible agencies, from human actors to non-human actants, sometimes placed within ‘broader contextual issues, related to certain institutional pressures, political decisions, economic imperatives, and some combination of them’ (Busco, Quattrone and Riccaboni 2007: 130). However, as Otley (2001: 260) has pointed out, ‘Accounting systems are often implicated in the wider processes of organizational change, providing both a vehicle through which such changes can be promoted but also a potential rigidity and barrier to change’. The installation or redesigning of the accounting system to be operated by an organization is influenced by a number of factors or ‘contingent’ variables. As Emmanuel, Otley and Merchant (1985: 47; see also Scapens and Roberts 1993) put it:

Theoretical and Explanatory Framework

27

The contingency approach to management accounting is based on the premise that there is no universally appropriate accounting system applicable to all organisations in all circumstances. Rather a contingency theory attempts to identify specific aspects of an accounting system that are associated with certain defi ned circumstances and to demonstrate an appropriate matching. Research in management accounting in the late twentieth century has suggested that major developments in organizational structure and accounting systems require motivators, catalysts and facilitators, but are often held back by barriers (Innes and Mitchell 1990; Cobb, Helliar and Innes 1995), including the attitude of personnel and existing organizational structures and cultures (Markus and Pfeffer 1983; Roberts and Silvester 1996). To become established, new systems of accounting have to secure legitimacy, and they must develop a workable relationship between the languages of production and accounting (Scapens and Roberts 1993). In the remainder of this section, we will adopt a modified form of the motivators/catalysts/facilitators approach. For Innes and Mitchell (1990), whose approach was based on contingency theory, the line of causation runs from motivators, through catalysts to facilitators. Motivators identified by Innes and Mitchell included factors such as the competitive nature of the market, organizational structure and production technology, with changes in any of these acting as potential catalysts for change. Other possible catalysts include the appointment of new accountants, while factors influencing the nature and role of the accounting function within the business may act as facilitators, namely by creating conditions which are necessary and ‘conducive to management accounting . . . but [are] not sufficient, in themselves, for the change to occur’ (Innes and Mitchell 1990: 12). Some of the factors noted by Innes and Mitchell are clearly influenced by conditions pertaining in the late twentieth century, and while some may be applicable, in an adjusted form, for the purposes of historical analysis, others are more problematic. Furthermore, there are two problems with the Innes and Mitchell framework from an historical perspective. First there is an inbuilt bias in their analysis which suggests that accountants must be in the forefront of the process of management accounting change. From a longterm historical perspective, when a wide range of actors contributed significantly to the process of accounting change, such a standpoint is clearly less tenable than, perhaps, for the late twentieth and early twenty-fi rst centuries. Second, historical analysis would suggest that the distinction between motivators, catalysts and facilitators are perhaps not as clearly delineated as Innes and Mitchell suggest. Our approach to the factors which have historically influenced change is therefore based on a modification of the Innes and Mitchell approach. The main difference is in respect to the issue of facilitators. Historical studies (see Section 4.4 below) have shown us that, in many, if not all, cases,

28 A History of Management Accounting two human actors are needed if change is to occur: an ‘actuator’ and an ‘implementer’. The actuator is an individual who has the necessary power and authority within an organization to enable the change to take place; the implementer is an individual who is capable of carrying through the change under the power delegated by the actuator. With this variation in mind, we will focus in Sections 4.1–4.3 below on factors which can act as motivators and in which changes often provide the necessary catalyst for management accounting developments. In Sections 4.4–4.5 we consider factors which can act not only as catalysts but also as facilitators, namely, agents of change, management ideology and information technology.

4.1. Business Size, Organizational Structure and Strategy In a small business the need for accounting information is at a minimum since owner/managers can take action based on direct observation. In larger businesses the separation of management from operating activity occurs both within and between workplaces, giving rise to the need for reports that enable ‘managing by the numbers’ (Ezzamel, Hoskin and Macve 1990: 161; Geneen and Moscow 1984). We will see that this happened on estates in medieval times (Harvey 1994; Noke 1981), under the domestic system in the late Middle Ages, within the great international trading concerns such as the Hudson’s Bay Company by the seventeenth century (Spraakman and Wilkie 2000), in the modern-style business enterprises such as the Dowlais Iron Company that began to emerge during the nineteenth century (Boyns and Edwards 1997a), and in the twentieth century with the development of the parent/subsidiary arrangement (e.g., Imperial Tobacco Co. Ltd) and the multi-divisional format (M-form) for business organization (e.g., ICI, BICC). As businesses have increased in size, the managerial arrangements have become more complex and the need for accounting information has increased. History shows that developments in the range of activities in which an entity is engaged, and changes in the way in which production is organised, have influenced this process. As landed estates grew in size or became involved in a wider range of productive activity, and as merchants traded in an ever-more diverse range of goods, those directing their affairs increasingly maintained separate records of the cost, revenues and profits associated with different activities. As industrialisation gained pace in the seventeenth and early eighteenth centuries, most organizations initially remained relatively small scale, and scattered, often selling partly processed goods to one another for further work to be done. A good example is the charcoal-based iron industry which consisted of independently run furnaces, forges and rolling mills. As these arrangements coalesced into regional partnerships (e.g., the South Yorkshire Ironmasters’ syndicate of the seventeenth/eighteenth centuries), however, market transactions were replaced by accounting numbers constructed to enable the relative

Theoretical and Explanatory Framework

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profitability of each physically separate entity to be assessed (Edwards and Boyns 1992). The development, during the Industrial Revolution, of factory or other worksite-located operations, in place of the former domestic system, created a whole host of additional accounting problems that needed to be resolved. The centralised production units brought together workers whose performance required monitoring, while also resulting in rising levels of overhead costs whose commercial significance needed to be understood (Boyns and Edwards 1997a; Chandler 1962, 1977; Fleischman and Parker 1992: 154– 155; Johnson 1972). As the size and complexity of business units increased, especially in relation to multi-plant and multinational enterprises, the uniformity of management systems became an important issue, as exemplified during the late nineteenth century and fi rst half of the twentieth century by chemical companies such as Albright & Wilson (Matthews, Boyns and Edwards 2003), United Alkali (Boyns, Matthews and Edwards 2004) and ICI (Pearcy 2001: Chapters 9–10). Other issues, such as the treatment of joint costs and how transfers of goods and services should be priced, have naturally become ever-more pressing. But they are not new issues. For example, the need for a system of transfer pricing was addressed by charcoal ironmakers in the eighteenth century (Edwards and Boyns 1992) and integrated iron and steel producers such as the Consett Iron Company and Pearson & Knowles in the second half of the nineteenth century (Boyns and Edwards 1995; Boyns, Edwards and Emmanuel 1999). In his examination of the emergence of large-scale business in the USA during the late nineteenth and twentieth centuries, Chandler (1962, 1977) concluded that there was a close link between organizational structure and business strategy, with the latter strongly influencing the former. While British business historians such as Barry Supple and Leslie Hannah have raised doubts over the extent to which this seemingly straightforward relationship is equally applicable to Britain, few of them have challenged the idea that, even prior to the Chandlerian period, there was some relationship between management accounting on the one hand and either strategy and/or structure on the other. Here, accounting history makes an important contribution to our understanding of business history. Major strategic decisions such as whether to continue in a particular line of business (Boyns and Edwards 1995), where to locate planned productive activity (Jones 1985: 25–32), and whether to renew a lease or acquire a new business (Pitts 2001) often required the development of new and imaginative valuation procedures and ways of measuring expected future costs and profits. It was also, of course, the case that strategic investment decisions resulting in a heavy expenditure on fi xed assets could stretch available fi nancial resources, thus highlighting the need for tight control as occurred at Boulton and Watt between 1800 and 1803 (Fleischman and Parker 1990, 1991: 368). Accounting changes accompanied discussions at the Consett Iron Company in the 1860s concerning whether the company should remain in the iron trade or simply

30

A History of Management Accounting

focus on producing coal (Boyns and Edwards 1995), and also occurred at the phosphorous manufacturer, Albright & Wilson in the 1890s following a switch from using coal to electricity that involved setting up operations in North America (Matthews, Boyns and Edwards 2003).

4.2. Competition and Market Demand The level of market demand and the degree of competition faced can obviously impinge on the methods used to control a business. Increased competition or falling demand enhance the need for greater efficiency and improved control of costs if the business is to continue to earn profits or, indeed, simply survive. Historical studies such as McLean (1995), Spraakman and Wilkie (2000) and Wells (1977: 49–50), for example, have identified declining market prices, growing competition and slackening demand as giving rise to a demand for improved management systems. Naturally, these factors could affect different industries at different times and in different places. It was a downturn in demand that caused the potter, Josiah Wedgwood, to carry out the famous costing exercise designed to identify the relative profitability of various product lines in the 1770s (McKendrick 1970; see also Burley 1958: 58; Edwards, Hammersley and Newell 1990: 64). Increased competition is thought to have squeezed profits in, for example, the Scottish iron industry in the 1790s (Fleischman and Parker 1990), at Boulton and Watt’s engineering operations in the early nineteenth century (Roll 1930), in the Welsh iron industry during the 1820s (Raistrick 1970) and in the Yorkshire flax spinning industry during the second quarter of the nineteenth century (Rimmer 1960). Solomons (1952a: 19) pointed to the growing level of competition in the engineering industry around the turn of the nineteenth century as one of the factors influencing the use of cost systems in the engineering sector. After the First World War, it has been suggested that the continued progress in the spread of cost calculation in British fi rms reflected ‘keen competition amongst producers all over the country’, stemming from the economic difficulties of the period (Jones 1926: 5). However, while increased competition is cited by successive generations as a key reason for change in cost calculation practices, measuring the degree of competition in a market is no simple matter. Furthermore, implicit in such a view is the notion that competition has continually ratcheted up over time and become more and more intense with every passing generation. Such an outcome seems unlikely and, since it is difficult to substantiate, represents a simplistic view which, we would suggest, can lead to misleading conclusions about the causes of accounting change. Certainly the business environment does change, and levels of competition fluctuate, both within and between periods, but it cannot automatically be assumed that these oscillations have centred on an ever-rising level of competition. Accounting changes within individual businesses and sectors may, indeed,

Theoretical and Explanatory Framework

31

be a response to a changed market environment but, at the macro level, it is difficult to sustain the argument that over several centuries competition has continually increased across the whole economy. Hence, while the level of competition can help to explain some of the changes at business and sectoral levels, it is more difficult to argue convincingly that it explains accounting changes at the level of the economy as a whole.

4.3. Production Technology Different industries utilise different production technologies, and even within the same industry, there may be a range of different methods that can be used to produce the same article. For an economist, the choice of technique partly depends on the size of the fi rm, itself a reflection of the size of the market and the fi rm’s share thereof (actual or intended), and the relative prices of different factors of production (e.g., low wage rates would suggest a labour-intensive method, high wage rates a more capital-intensive one). Other important factors are the nature and type of the product, namely whether it is a high or low quality product, and whether its production is simple or complex. In the late nineteenth century and the fi rst half of the twentieth century, authors of accounting texts often discussed the form of cost calculation most suitable for particular industries, indicating that this was dependent on the nature and type of product and the production technology. Among the methods discussed most frequently were job (or terminal) costing, process costing, and unit (or single output) costing. In the fi rst decade of the twentieth century, Gee & Co., a major publisher of accounting texts at the time, published a series of books on different types of costing: Multiple Cost Accounts (Garry 1906) applicable in those industries in which a range of related products were produced by the same business, for example engineering specialties, cycles, furniture manufacturing, and agricultural implements; Terminal Cost Accounts (Nisbet 1906) used in situations where ‘defi nite contracts are entered into’, for example engineering, shipbuilding, building; Single Cost Accounts (Mitchell 1907) applicable to industries which produced, in essence, a single or limited range of (largely) homogeneous products, for example breweries, collieries, quarries, mines; and Process Cost Accounts (Garry 1908) applicable in the chemical industries, food production, tanning, fellmongers, where there were both principal and by-products. General texts on cost calculation published from the 1930s through to the 1950s followed this practice by providing descriptions of the main types of costing, often also indicating the range of industries for which each method was considered applicable. Thus Wheldon (1932) contains chapters on job or terminal costing, process costing and unit or single (output) costing, while Bigg (1932) has chapters devoted to contract cost accounts, process cost accounts, and ‘single or output costing and operating costs’. In 1944, a text by Wheldon titled Applied Costing in Selected Industries was

32

A History of Management Accounting

published, in which a few pages are devoted to each of a host of industries indicating the most appropriate method of costing to be used and providing examples of the forms to be used therein for presenting cost information. After the Second World War, however, this practice began to fade away with many, though not all, authors increasingly considering it inappropriate to devote space to distinguishing between the different methods of costing, focusing more on the general principles underlying costing/cost accounting.7 This change of emphasis, reflecting a growing academisation of management accounting (see Chapter 8), can also be found in successive editions of Costing Terminology produced by the ICWA: in the fi rst edition, published in 1937, defi nitions are given of ‘batch’ (or ‘bunch’) costing, job (or terminal) costing, multiple costing, operation costing, single (output) costing, and unit costing; in the 1952 (second) edition, however, none of these terms are included, though ‘job’, ‘batch’ and ‘product group’ are listed as different ‘cost units’ that can be used as the basis for ascertaining or expressing costs. While texts of the post–Second World War era increasingly ignored the link between production technology and accounting methods, historical research has revealed the importance of such a link. In their study of industrial revolution iron companies, Fleischman and Parker (1992: 155) conclude that ‘technological innovation was clearly related to the owners’ assessment of the impact on overall process costs’. More specifically, Fleischman and Parker (1991: 370) believe that the increased attention devoted to cost analysis by iron making as compared with textile manufacturing companies was due to the greater level of technical sophistication required to produce these goods, in turn interpreted as an indicator of ‘fi rm complexity’. In his study of the nineteenth-century Sunderland shipbuilding industry, McLean (1995) draws attention to the difficulty, within early records, of fi nding explicit evidence enabling the identification of cause and effect in relation to changes in cost calculation methods. Nevertheless, he utilises other sources of illumination to justify the following conclusion (McLean 1995: 142): the weight of evidence in the contemporary literature suggests that it is highly likely that a major factor [causing accounting innovation within shipbuilding] was the need for more extensive cost analysis in order to provide information for pricing decisions in a competitive environment during a period of technological and organizational change. An example of the impact on cost calculation of technological and organizational change in the late nineteenth century draws on the archives of Albright & Wilson. In the early 1890s this Oldbury (Birmingham) based chemical company introduced new, continuous electrolytic methods for producing phosphorous and was exploring the potential of hydro-electric power at Niagara Falls. Although not a large business by Chandlerian

Theoretical and Explanatory Framework

33

standards, the technological developments which turned this company into a multinational enterprise were associated with organizational changes, including the appointment of a professional, salaried manager, from outside the ranks of the owners. Given these interrelated changes, during the 1890s and early 1900s the company developed new accounting methods, including cost standards, for monitoring and controlling the performance of its plants in the USA and Canada (Matthews, Boyns and Edwards 2003). In the twentieth century the development of mass production in the car industry undoubtedly helps to explain why Austin Motors developed an integrated control system based on standard costs and budgetary control (Perry-Keene 1922–23), though this may not have been the only factor causing this accounting innovation. Likewise at other companies where technological innovations were often accompanied by organizational and other changes, disentangling cause and effect is difficult if not impossible. Nevertheless, it is clear that production technology did sometimes influence the choice of cost method employed, not only within individual fi rms, but also in different sectors of the economy.

4.4. Agents of Change Historical studies have suggested that a single, powerful individual within a fi rm, for example, Josiah Wedgwood, can be both the actuator and implementer of management accounting change, the catalyst being the poor fi nancial performance of the fi rm due to changing market conditions (McKendrick 1970). However, as fi rms grew in size, it was rarely the case that a single individual could entirely carry through major accounting changes. Indeed, more often than not two individuals, or perhaps more correctly two types of individual, have been important in bringing about change: one to enable the change to occur (the ‘actuator’), the other to implement it (the ‘implementer’). The former group includes those who both have the desire to see that change takes place and the power to ensure that such changes are put into effect; the latter group comprises those who have the relevant skills and ability to introduce the changes, and this can include individuals who are either internal to the organization or are external, for example a consultant. While the existence of actuators and implementers does not necessarily ensure either that change will be introduced or, if introduced, that it will be implemented successfully or remain in place for any substantial length of time, without them change will not take place at all. Although the nature and types of changes that have been introduced have altered over time, the need for actuators and implements appears to be ubiquitous. In the 1850s/1860s, for example, G.T. Clark (trustee) and William Jenkins (accountant) fi lled these respective roles at the Dowlais Iron Company, while in the fi rst years of the twentieth century Hans Renold (the owner) actuated and A.H. Church (consulting engineer) implemented accounting change (Boyns 2003). After the First World War, at Austin Motors,

34

A History of Management Accounting

Sir Herbert Austin (owner) facilitated and Perry-Keene (cost accountant) implemented, while at the United Steel Companies Ltd. in the late 1920s, Benton-Jones and Hilton (managing directors) actuated, while Dunkerley (cost accountant) implemented (Edwards, Boyns and Matthews 2002). In the 1950s, at BICC, accounting changes were overseen by the chairman and chief executive W.H. MacFadzean (accountant) and implemented by R.M. Fairfield (manager and engineer) (Boyns 2009a). While, today, consultants are often an important influence in the implementation of change, this has not always been the case. Of the cases cited above, only Hans Renold Ltd. involved the employment of an outside consultant. Thus, even well into the twentieth century the knowledge and skills of a fi rm’s own employees and managers, together with new ideas which they were able to develop themselves, could be vital in activating change. Jones (1985: 193), reviewing developments up to 1830, has suggested that industrial bookkeeping and accounting techniques had their origins in the experience and knowledge that proprietors and their agents brought with them to their new businesses, a view which is largely confi rmed by Boyns and Edwards (1996a; see also King 2010). In their study of the dissemination of accounting technology in Wales’ basic industries c.1750–1870, Boyns and Edwards draw attention to significant movements of personnel, for example clerks, agents, managers and bookkeepers, within the Welsh iron industry, which was bound together by a distinctive ‘corporate culture’ that included ‘shared fi nancial and marketing circuits’ (Evans 1990: 30, 36). The movement of personnel between organizations has always proved important in the process of diff using accounting practices, not least those of standard costing and budgetary control between the two world wars when Roland Dunkerley and other members of the ICWA implemented change at the fi rms to which they transferred their allegiance (see Chapter 9). All of this, however, still begs the question: From where did such management accounting skills originally emanate? For many centuries such knowledge may have been mainly passed on from father to son, or from business partner to business partner, or from owner to clerk but, eventually such knowledge came increasingly to be written down. Once this happened, the process of disseminating knowledge more widely could also occur through the reading of manuscripts, articles and books. The extent to which these different sources have existed, as shown throughout this work, has varied over the centuries and has clearly altered the parameters within which the education and training of individuals engaged in cost calculation has taken place. Indeed, a key influence on management accounting change during the twentieth century has been the rise of various types of institution. These institutions include the larger-scale businesses which, through mergers and takeovers, generate accounting change by, for example, insisting on uniformity of the accounting methods used across the newly merged entities. Whether this requires the new components to conform to systems already in

Theoretical and Explanatory Framework

35

existence or involves a complete overhaul of accounting systems in recognition of the increased size of the organization will vary from case to case. Beyond the level of the firm, we find institutions formed to represent groups of firms operating within the same industry or sector, and these can influence the accounting methods used through, for example, drawing up cost calculation norms. Thus, before the First World War, the British Federation of Master Printers developed a uniform costing system (Mitchell and Walker 1997), while other trade bodies did so after 1918 (Boyns 1998b; Edwards, Boyns and Matthews 2003; Most 1961; Solomons 1950). Perhaps more significant, in terms of its long-term impact on the development of management accounting and the construction of management accounting as a profession, was the formation of the ICWA (in 1919) which published its own journal and organised national costing conferences from the early 1920s (see Chapter 8). Another institution which is considered by Loft (1986, 1990) to have played an important role in management accounting change is the Ministry of Munitions, though some have reservations concerning its overall impact (see Chapter 9). Moreover, while cataclysmic events such as the First (and Second) World War clearly had a major effect on the relationship between the state and business (Tomlinson 1994), it was not only then that government decisions influenced accounting techniques. The nationalisation of a number of major business sectors immediately after the Second World War (see Chapter 9) had an impact on accounting methods employed in industries such as coal (Boyns 1997) and railways (Gourvish 1980), as did attempts by the Treasury to achieve better financial control of public corporations and nationalised industries, during the 1960s, through the adoption of DCF methods of investment appraisal (Miller 1991). A further institutional mechanism which came to play an increasing role in accounting change during the twentieth century was management consultancy. Consultants, of course, are not merely creatures of the twentieth century. Various groups have evolved at different times in history to act in the capacity of special business advisors. Oldroyd (1996) has shown that colliery viewers were instrumental in disseminating mining expertise and quite possibly cost calculation practices among eighteenth century coal companies, while Pitts (2001) notes that surveyors such as William Armstrong played a similar role in the coal, iron and steel industries from the middle of the nineteenth century. Also from this time, accountancy fi rms began to supply services to their audit clients (Matthews, Anderson and Edwards 1998), while individual cost and industrial consultants began to advise on cost calculation matters from the end of the nineteenth century. Between the two world wars (see Chapter 9), several management consultancy fi rms established themselves in Britain, including the US-based Bedaux and Stevenson, Jordan and Harrison. After the Second World War, British accountancy fi rms began to offer consultancy services to their clients on a much-increased scale (Jones 1981, 1995), particularly in developing systems of cost calculation and introducing budgetary control.

36

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4.5. Management Ideology and Information Technology Economic rationalists, or neoclassicists, often see change as brought about by a combination of demand-side and supply-side influences (Berland and Boyns 2002). Often the emphasis is on the demand side, with the assumption being that supply will adapt to demand. This is the approach adopted by Chandler (1977) who argued that growth of the M-form decentralised organization necessitated adaptations in accounting to enable ‘managing by the numbers’ through standard costing, budgetary control and the development of performance indicators such as the ROI. In contrast Levenstein (1991) argues that demand-side explanations are sufficient only if the supply of accounting techniques is stable and perfectly elastic, which are conditions that are unlikely to hold. For Johnson and Kaplan (1987: Chapter 5) the causal connection between the move to the M-form and accounting developments is the reverse of that suggested by Chandler: it was the development of accounting ideas that made possible the development of the M-form structure. Alford (1976), however, has suggested that the relationship between strategy and structure is symbiotic rather than causal, and the same may be true of the relationship between these issues and management accounting. Clearly a new technique cannot be introduced until it has been ‘invented’, but many such inventions will have been the result of a trial and error process within an organization (Baxter 1981), something which may have taken years to fully develop. While the search for new techniques or approaches might be demand driven, the possibility cannot be excluded that a new technique may have been developed simply as the result of somebody having a ‘good idea’, either as the result of observing some practical problem and trying to overcome it, or as a result of ‘blue skies’ thinking. However, ways of thinking about problems, and/or trying to address them, are undoubtedly influenced by social and cultural factors. Thus, in her study of the growing use of statistical information and graphical presentation techniques for control purposes in large US firms during the late nineteenth and early twentieth centuries, Yates (1989, 1994) has argued that supply-side and demand-side factors alone are not enough to explain what happened. Yes there was a development of (supply-side) technology, for example typewriters, pre-printed forms, duplicating equipment, storing and retrieval systems (e.g., vertical and card filing), analytical machines (e.g., tabulating, adding and calculating machines such as the Hollerith8) and presentational devices, which clearly played an important role in the wider use of information. Also, the growing size of businesses undoubtedly created a demand for information. However, in Yates’ opinion these two factors alone are not sufficient to explain the full extent of the revolutionary growth in the use of information in American firms between 1880 and 1920. For Yates (1994: 47): The systematic management ideology, with the premium it placed on managing through written information, reinforced the adoption of new

Theoretical and Explanatory Framework

37

devices and techniques, which in turn reinforced the ideology by reducing the cost and increasing the symbolic attractiveness of following it. It was the development of this new management ideology, systematic management (which is not to be confused with the narrower concept of scientific management), which provided the catalyst within which the supply-side and demand-side forces operated. The potential spillover effects to accounting, and especially management accounting, would seem to be clear. A similar step-change in the use of information is judged to have occurred after the Second World War with the advent of the computer (Yates 1994). Tyson (1996), for example, notes how advancements in manufacturing and information technology in the 50 years after 1946 affected cost accounting and the development of management accounting systems.

4.6. Overview Business size, business strategy, organizational structure, market demand, competition, production technology, management ideology and information technology all impact on the type of accounting information considered to be useful to business decision makers and, hence, the nature of management accounting systems utilised within business organizations. Moreover, individuals and networks, for good or ill, play an important role in both disseminating information and helping to diff use practices. Change is thus a complex process which is likely to occur at different rates, in different fi rms, sectors and economies at different times. It involves many factors, which are often inter-linked, making it difficult if not impossible to determine the relative impact of individual influences. Disentangling events, in order to try to better understand those factors that have influenced changes in the past, is no simple task, and relevant parts of this book contain our attempt to scratch the surface of this complex issue.

5. RECAPITULATION This work focuses on constructing a picture of management accounting practices used at different points in time in Britain since the late Middle Ages. The major changes that have occurred and when they occurred are discussed, and an attempt is made to understand how and why they came about. In interpreting these events we employ, principally, an economic rationalist/neoclassical explanatory framework. This does not mean that the impact of social, cultural, legal and political factors is ignored in narrating our ‘story’, but rather that the emphasis of our explanations will lie with economic factors. We consider this approach to be particularly appropriate given our focus on the study of management accounting change within profit-seeking business organizations. Though management’s priorities are not always dominated by concerns with

38 A History of Management Accounting profit maximisation, profit is a sine qua non of long-term survival and, therefore, is assumed to be the goal of most businesses. In these circumstances, it becomes almost a truism that economic factors will generally drive both the search for efficiency gains and changes in management accounting. While non-economic factors might well influence the nature, extent and timing of such changes, they are not recognised as the major drivers for the changes which we examine in the rest of this work. We also reiterate our conviction that the management accounting changes depicted below are not necessarily seen to represent any form of improvement either in the short term or the long term. Our line of reasoning, nevertheless, is that rational, businessmen and women will usually have implemented accounting change in the expectation of positive outcomes in terms of enhanced levels of efficiency and a higher level of profit than otherwise would have been achieved. Finally, we do not see the development of management accounting in terms either of a ‘fall and rise’ (Otley 1983) or a ‘Rise and Fall’ (Johnson and Kaplan 1987); rather we see the use of accounting information for managerial purposes as having developed over several centuries and been marked by both continuity and change.

Part II

Late Middle Ages to the Industrial Revolution

3

Estate and Farm Accounting

1. INTRODUCTION This chapter examines the use of accounting for management purposes by owners and occupiers of land wishing to make the most effective use of that resource. Some attention is given to relevant events during the late Middle Ages which Dyer (2005; see also Britnell 1993) christens ‘The age of transition’. There, Dyer (2005: 245) studies the transition from medieval to modern times, or from feudalism to capitalism, and presents compelling evidence of the beginnings of an agricultural-based market economy with a particular impetus occurring after 1400 when ‘the aristocracy were weakened by their loss of direct management of agriculture, and let the economic initiative pass to their social inferiors’. This provided a welcome opportunity for upward social and economic mobility with the ‘farmers who managed the largest units of production . . . often recruited from the upper ranks of the peasantry’ (Dyer 2005: 245; see also Britnell 1993: 201). Given limitations on the accounting evidence presently available, this chapter’s main focus is on developments that occurred with the rise of the ‘capitalist farmer’ (Bryer 2006a; Tawney 1967: 403) during the agricultural revolution which, for the agrarian historian Mark Overton (1996), spanned the period 1500–1850. The transformation in agricultural practices that then took place massively increased productivity and output. Radical farming innovations included the enclosure of land, increased mechanisation, new systems of crop rotation, and selective breeding.1 This chapter examines the role played by two different accounting systems used to record and report the financial effects of renting and farming land; charge and discharge accounting (CDA) and double entry bookkeeping (DEB). In doing so we consider their role in the provision of information for landowners and their managers for performance assessment purposes. The remainder of this chapter is structured as follows. First, recognition by landowners of the need to exploit effectively the resources available to them is highlighted. What is known about agricultural accounting practice is next summarised, followed by a study of the managerial potential of

42

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accounting as revealed in the relevant literature. Finally, we present our concluding remarks.

2. EXPLOITING THE LAND The development of a ‘capitalist mentality’, involving a focus on profit and invested capital and the reallocation of resources to achieve highest returns, is often associated with the commercial revolution (Bryer 2000a, 2000b, 2006a). This is understandable given the fi xed nature of the landowners’ assets and legal restrictions placed on their ability to sell property (Napier 1991: 164).1 However, despite limitations on their ability to transfer their capital to alternative uses, there is evidence of landlords demonstrating a concern to employ resources in the most effective manner. Some historians believe it is possible to detect a capitalist spirit among farmers and, indeed, consider the pursuit of profit to have been a driving force in the agricultural revolution. Bryer (2006a: 370) strongly argues in favour of this view based on an analysis of the ‘limited evidence we have of farmers’ accounts from the seventeenth to the late nineteenth century’. The way in which English landowners sought to exploit the income-producing potential of their land varied between the broad alternatives of farming their properties or renting them out. Up to the thirteenth century ‘the bulk of [estate] income was received in the form of fixed rents’ (Oldroyd and Dobie 2009: 101–102). Then, for about 100 years (c.1270–1380), landowners sometimes reclaimed ‘the demesne and [undertook] its direct management’ (Oldroyd and Dobie 2009: 102). The broad thrust of arrangements again reversed during the later Middle Ages (the fourteenth and fifteenth centuries) as ‘Many estates, both lay and ecclesiastical, abandoned the direct farming of their own lands, leasing farms or even whole manors to tenants and commuting labour services for payments in money or kind’ (Bettey 1993: 29).2 In the seventeenth and eighteenth centuries, the gentry and aristocracy ‘normally let the greater part of their estate to tenant farmers’, but many of them also had, sometimes very large, ‘home farms run predominantly for the needs of the household’ (Habakkuk 1953: 93). In choosing between the different ways in which land might be employed, there is little doubt that the desire to increase income and wealth played its part. During the later Middle Ages, ‘profits from monastic estates and the income derived from pilgrims went to fund the building of even larger churches and cloisters, complete with elaborate decorations and rich furnishings’ (Bettey 1993: 38). By the seventeenth century, Bettey (1993: 76–77; see also Bryer 2006a; Tawney 1941) comments, Although some landowners regarded their estates merely as a source of social status and political power, and others could lavish upon their property the wealth which they had acquired elsewhere, many

Estate and Farm Accounting 43 depended on the income of their estates for their livelihood and were eager to exploit sources of profit which their lands could provide. But wealth generated from renting or farming the land was not always sufficient to fulfi l social and economic ambitions. Sir John Oglander, of Nunwell in the Isle of Wight, emphasised the need for a mid-seventeenth century country landowner to also have income from industry, trade or a profession; otherwise ‘it is impossible for a mere country gentleman ever to grow rich or raise his house . . . By only following the plough he may keep his word and be upright, but he will never increase his fortune’ (quoted in Bettey 1993: 79). It was during the seventeenth century that landowners increasingly sought to enhance their wealth by exploiting the industrial and mineral potential of their estates: ‘Sussex gentry families such as the Smiths, Fullers and Evelyns encouraged the iron industry of the Weald in Kent’ (Bettey 1993: 79). Those who greatly augmented their wealth through coal mining included the Dudleys and Foleys in the Black Country, the Willoughbys of Wollaton and the Lowthers in Cumberland. Landowners who also made money by diversifying into port development included: Lowther at Whitehaven in the 1680s; the Curwens in Workington in the eighteenth century; and the Butes in south Wales in the nineteenth century. It is possible that the degree of involvement by the gentry in industry-based money making activities diff ered between regions. Ellis (1998: 115) refers to the astonishment of a southern, aristocratic, visitor to Newcastle on fi nding ‘Every gentleman in the county . . . is so solicitous in the pursuit of gain as a tradesman. The conversation always turns to money’. However, Ellis (1998: 115) further points out, ‘Some of the greatest colliery proprietors were basically southern gentlemen’. Actions increasingly taken by landowners to exploit the mineral content of their terrain are considered more fully in Chapter 5 which focuses on proto-industrialisation.

3. ESTATE ACCOUNTING PRACTICE In this section we consider evidence of accounting used by owners and managers of land to assess performance and, in some cases, to inform decision making. The reason for making these accounting calculations often remains unstated. Hoskin and Macve (2000) caution against imputing motives in the absence of hard evidence, while Miller and Napier (1993: 633) criticise accounting historians for ‘imposing the burden of present meanings on past [accounting] practices’. But as Littleton and Zimmerman (1962: 246) observe, ‘Although the needs and ideas which prompted those actions were not indicated, they are nevertheless not beyond reasonable conjecture’. Moreover, we will see that motives were sometimes made crystal clear. The use of CDA for managerial purposes is fi rst considered.

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A History of Management Accounting

3.1. Charge and Discharge Accounting3 On landed estates, CDA remained in situ for centuries before being superseded by DEB. There has been too great a tendency to categorise CDA in terms of a narrow stewardship role, even though it must be acknowledged that the bulk of charge/discharge accounts may have been entirely cash based and intended to serve only that purpose. The early accounting history literature placed particular stress on the personal accountability aspects of CDA: ‘The lord’s incentive for keeping accounts arose from his need to check on the integrity and reliability of these stewards, to prevent loss and theft’ (Chatfield 1977: 25; see also Forrester 1978b: 54). The well-known accounting historian A. C. Littleton (1933: 260) is not alone in dismissing CDA as having, as its sole purpose, verification of the honesty of ‘persons charged with fiscal, rather than managerial, responsibilities’. As is the case elsewhere within accounting historiography, more recent research (including a growing awareness of relevant work by economic and social historians) has caused earlier characterisations of CDA to come under challenge. Studies have shown that manorial and monastic accounting at least sometimes went beyond concerns with personal accountability, though this might occur outside (even if drawing upon) a CDA framework (Kirk 1892; Stone 1962; Dobie 2008, 2011).4 For example, it has been shown how, in the thirteenth century, the monks of Norwich Cathedral Priory took steps to inform themselves of profit or loss (Stone 1962), while a concern to discover the fi nancial results of husbandry might involve inspection of ‘the docket of the particular official who managed the demesne’ (Finberg quoted in Jack 1966: 155). Smith (1941) reveals that clerics at Canterbury Cathedral Priory went ‘further than the Norwich accounts by supplying the yearly value of agricultural produce as a basis for calculating all receipts in hand’ (quoted in Jack 1966: 156). If a valuation of an estate was required, inventories were made (Jack 1966: 155–156; Chatfield 1977: 25). For example, the 1303 accounts of the Benedictine House of Jarrow include a report on inventories followed by a cash-based CDA (Stone 1993: 8), while ‘Sometimes an account narrative was interrupted to make room for estimates of what might have been earned if a different course of action had been taken’ (Chatfield 1977: 25). It therefore seems reasonable to observe that, even where there were limitations in the managerial potential of CDA as operated by monasteries and manors, it imposed no constraints on the ability of principals to obtain the information required to monitor and manage their affairs. These, and his own fi ndings, caused Dobie (2008) to conclude that research into CDA has focussed excessively on agency relationships between the lord of the manor and stewards responsible for managing agricultural properties, and argue the need for ‘a broader focus considering the medieval accounting records of monastic houses as one of a variety of elements of financial management and control’ (Dobie 2008: 142). It is also the case that historians, as did

Estate and Farm Accounting 45 writers of accounting texts on CDA (see below), focused too much upon ‘the highest level of the estate’s fi nancial administration’ (Harvey 1994: 111)— the statement of charge and discharge. This was at the apex of, often, an extensive system of record keeping which comprised numerous ‘subsidiary records of account’ that would be used to micro-manage the estate (Harvey 1994: 111; see also Lee 1991). The broader system of estate record keeping also encompassed surveys of possessions and revenues which (1) identified the resources, for example rental income, that the lord of the manor could expect to receive; and (2) could be used to help fi x a price when estates came up for sale, for example the disposal of church lands by Henry VIII based on so many years purchase of the rental value (see below). A role beyond narrow defi nitions of stewardship is also demonstrated by the application of CDA to early industrial ventures (Oldroyd and Dobie 2009: 108–110).5 As the landed class began to exploit the industrial potential of the properties they occupied, CDA was employed by, for example, the Willoughbys of Wollaton, Nottinghamshire, in their fi fteenth/sixteenth century colliery accounts (Lee 1991), by the Midlands-based Foley family who turned charcoal ironmakers in the seventeenth century (King 2010) and on the industrial estates of the north-east of England in the eighteenth century (Oldroyd 2007). At Wollaton, for example, evidence of the use of data for performance assessment includes four-weekly comparisons of cashbased inflows and outflows to reveal the profit (proficuis) and, according to Lee (1991: 61, 64, 72), enable judgements to be reached about whether ‘mining was worth continuing’. CDA remained in operation in certain sectors of the economy into the nineteenth century and perhaps beyond, with studies of some of these records bearing testimony to its wider potential. The system of charge/discharge in operation at Magdalen College, Oxford in 1812 (and which continued in place till 1882), for example, was designed to enable identification of the agricultural surplus that determined the annual dividend payable to College fellows (Jones 1991: 144). Napier (1991: 173) concludes that the system of CDA used to account for the Marquis of Bute’s territories in the nineteenth century, with its focus on rental entitlements and cash flow, ‘would have provided a clear and accessible overview of the current fi nancial position of the estate’. Further, the ‘owner’s capital investment in the land was regarded as fi xed and permanent, and [CDA-based] cash flows provided a good measure of return’ (Napier 1991: 174).

3.2. Other Sources of Managerial Information The use, by industrialists, of accounting information created outside a formal system, for performance assessment and decision making purposes, is fairly well documented (Edwards 1989). Freaar’s case study of Robert Loder is apposite in the farming context. The account book kept by this ‘Jacobean management accountant’ (Freear 1994: 473) for the period 1610–20

46

A History of Management Accounting

certainly did not comprise a formal accounting system. Indeed, Loder’s records have ‘been criticized as being mathematically inaccurate, arbitrary in content, and primitive in accounting form’ (Freear 1994: 478). However, the substance of accounting records is usually more important than their form and, consistent with Jack (1966), Freear considers the essential question to be whether information is suitable for its intended purpose. Freear demonstrates how Loder’s account book collected together the statistics needed to make a range of different managerial decisions. For example, data were assembled to decide on the allocation of acreage between the production of wheat and barley (Freear 1994: 475) and to assess a range of alternative courses of action, such as whether to purchase barley for seed rather than to use his own barley for that purpose, whether or not to malt barley before sale, and whether to malt barley himself or get someone else to do it (Freear 1994: 476). To help ensure the decision usefulness of his accounting information, Loder ‘calculated the opportunity cost at 10 per cent per annum of tying up his money in growing crops when there existed an alternative course of action’, and he charged inter-enterprise transfers at weighted average market price as a measure of ‘the cost of the opportunity forgone by retaining for internal use produce which would otherwise have been sold’ (Freear 1994: 477). Loder’s account book has been the subject of significant study (Freear 1994: 473) with, for example, Thirsk (2004) describing the Berkshire farmer as ‘obsessed with counting the profits from every single operation on his farm’. Indeed his aversion to ‘dead stock’ extended to his fretting over the engagement of maidservants whose routines did not show any farming profit, although conceding that they dealt with malting for household beer and ‘thinges that must indeed be donne’ (quoted in Thirsk 2004). Loder’s records are also celebrated by Bryer (1994: 225) who considers them to display ‘clear evidence of capitalist profit calculation’. In addition to some of the features rehearsed above, Loder refers to the ‘worsening’ of the horses, ‘the wearing out of the sayd horse’ and the charge for ‘the wearing of him out some in the time I mow’ (quoted in Bryer 2000b: 372). The accounting treatment Loder adopted, which in one instance resulted in the cost of a horse being written off over about nine years on the straight-line basis, is described by Bryer (2000b: 372) as ‘depreciation expenses in the modern sense—the cost of the use-values consumed in the production of commodities’. Standard measures to serve as a yardstick against which actual results might be compared were in use early on as a means of measuring performance independently of any formal system of bookkeeping. Oschinsky (1956: 95–96) explains how medieval treatises contained instructions designed to help auditors measure the efficiency and honesty of subordinates by, for example, indicating the amount of salt that should be allowed for salting a specified quantity of meat and advising them ‘to compare the corn yield with the seed-corn in the previous roll and with the acreage as shown in the extent’ (Oschinsky 1956: 95). In a similar vein, standard yields were

Estate and Farm Accounting 47 developed for crops and livestock in the thirteenth century (Lamond 1890: 71ff; Scorgie 1997), with Macve (1985: 240; see also Noke 1981) describing how these measures were exploited by the auditors of medieval estates: ‘The fi nal audited account contained not merely receipts and payments that had occurred but those that the auditors considered should have occurred (e.g. by reference to the standard yields of land and livestock)’. Jack also reminds us that an early concern with efficiency and even profitability need not be evidenced by any accounting calculations whatsoever. Here, the audit was important in evaluating and thereby helping to ensure ‘the success of the lord’s exploitation of his estates’ (Jack 1966: 154). The auditor would ‘examine the fields to see how much was sown and whether it had been well done; examine the stock and the increase and investigate deaths and barrenness; inventory the grange; examine the equipment’ (1966: 154). MacLean (2009: 63; see also Woodward 1984) studies the management potential of the farm book and memorandum book written up by the seventeenth-century ‘working gentleman farmer’, Henry Best, who made extensive use of non-fi nancial information to measure and manage human performance on his farm in Elmswell, Yorkshire. The records he maintained revealed: the annual rates of pay and job descriptions for different categories of farm servants; the daily wage rates of dayworkers; the manner in which tasks should be performed; and the amount of labour required to achieve a particular level of output at identified locations. For example, ‘6 good dayworkes’ at Hither Long would be expected to yield ‘eleaven score and six grasse cockes [of hay], which were nine loades’, whereas ‘4 indifferent dayworkes’ at Spellowe would be held accountable for a target output of ‘five score and nine grasse cockes, which were fower [four] good loades’ (MacLean 2009: 67). MacLean (2009: 71) concludes that Best’s focus on the non-fi nancial aspects of human accountability ‘provides further understanding of the precursors of accounting-based standard costs and the transition from pre-modern to modern management control systems’.

3.3. DEB and the Persistence of CDA Given the supposed advantages of DEB (Yamey 1956: 7–8), why did it take so long to supersede CDA and other single entry systems of record keeping on landed estates? DEB was unavailable in Britain when medieval religious and secular institutions began to account for their affairs based on charge/discharge but, even when it did become available, the move from CDA to DEB does not appear to have occurred quickly. The next section in this chapter reveals that several seventeenth- and eighteenth-century writers of accounting treatises saw DEB as providing more relevant information for managerial purposes than CDA, but existing accounting historiography contains little evidence of the use of DEB on landed estates. One place where there is evidence of its employment is on the Mackworth Estate in south Wales, 1759–60 (Jones 1985: 52–60). Herbert Mackworth

48 A History of Management Accounting and his steward and ‘accomptant’ Herbert Cross (Jones 1985: 52) operated a scheme of bookkeeping designed to enable the preparation of a charge and discharge statement of the agent’s accountability, while also encompassing a ledger kept on double entry principles and organised in such a way as to identify the income, costs and profits of separate operations.6 A profit and loss account for the year ending 13 December 1760 matches profits arising from a range of activities—including coal, wheat, barley, brickmaking—with overhead costs such as maintenance of the gardens, household expenses, servants’ wages and general charges (Jones 1985: 56). We can see here evidence of landowners engaging with industrial activity, and Chapter 5 considers further the use of DEB when associated with the industrial exploitation of a landlord’s terrain. Mackworth apart, there is little evidence that landowners engaged much with DEB, at least up until the end of the eighteenth century and possibly much later. As noted above, Jack (1966) is convinced that those responsible for installing and operating accounting systems should not necessarily be criticised for ignoring the ‘modern [system of] bookkeeping’ (Hayes 1739, title page) disseminated from Italy in the centuries following the publication of Pacioli’s Summa in 1494. Why not? The following is one possible reason: If they were unlikely to move towards DEB, it may be partly because the idea of capital had little meaning: their land was their capital, it was fi xed, immovable, and the only way they could calculate its value was by working from the return, by rating total value at so many times the annual net produce. (Jack 1966: 155; see also 157) The persistence of CDA cannot, of course, be seen as irrefutable evidence of its utility compared with DEB. Inertia or, perhaps, ‘path dependency’ (Djelic 2008) might help to explain the absence of change, while lack of competition might mean that failure to employ a better accounting technology had no significant impact on the ability of an entity to survive or even prosper, though it might do less well than would otherwise have been the case. It is also the case that, with the steward often starting working life as a clerk on an estate, the scope for cross-fertilisation of ideas and practices from industry to estates would have been limited. A further explanation for lack of change might draw on cultural factors. Here, there is the possibility that the gentleman landowner might not consider an accounting system closely associated with ‘trade’ as appropriate for recording the fi nancial affairs of the gentry and aristocracy, though English landowners are thought to have been more commercially orientated than their Continental counterparts (Habakkuk 1953: 98). Lemarchand (1994) reveals a prejudice against mercantile accounting within governmental circles in late eighteenth-century France, with the following comment attributed to the politician and fi nancier, Count Mollien (1758–1850), born Nicolas François, son of a trader:

Estate and Farm Accounting 49 Determined . . . to introduce a small portion of what is known as double entry bookkeeping into the public affairs that I am to manage, I was wise enough not to brag about this innovation . . . People would have jumped at this, saying that it was beneath the dignity of a public administration to borrow methods from trade. (quoted in Lemarchand 1994: 137–138) However, ‘after a long period of competition between the two systems, DEB gained the upper hand [in France] and was increasingly adopted by most large industrial concerns from around 1810–30’ (Lemarchand 1994: 120). Lemarchand (1994; see also Keenan 1998; Napier 1998) attributes the eventual success of DEB to the fact it could do all that CDA offered, and more: it provided measures of performance, profit and fi nancial position. Following this line of argument, one would imagine that the owners of landed estates would have wished to exploit the reporting potential of DEB as that system became available to them. As noted above, it is not possible to sustain the argument that the aristocracy was uninterested in DEB because, for them, profit was not important.7 While landowners might have substantially delegated management to an army of stewards, bailiffs, reeves and agents, they remained reliant on the income from land to fi nance the conspicuous consumption and lifestyle which marked them out as people of substance and to provide them with ‘the foundation of [their] social and political influence’ (Napier 1991: 164). So although the term profit-seekers might not apply to them in the same way that it did to merchants of the commercial revolution and to entrepreneurs of the industrial revolution, it was still important for them to make best use of their resources, within the constraints placed upon them by law, custom, and the nature of their investment, in order to enhance their prestige (Beckett 1986: 320; Napier 1991: 164). So this leads on to the question of whether there was an inherent absence from CDA of the ability to provide landowners and their agents with information relevant to performance assessment and decision making. Section 4 interrogates the contemporary literature on estate accounting to help throw light on this issue.

4. ESTATE ACCOUNTING LITERATURE From the mid-thirteenth century onwards there began to appear didactic works on estate management containing expositions of the charge and discharge method of accounting and accountability (Oldroyd and Dobie 2009: 101). These included Walter of Henley’s Boke of Husbandry, the Seneschaucie, the anonymous Husbandry and the Rules of Robert Grossetête’ (Oschinsky 1956: 92; see also Dobie 2008; Harvey 1994; Oschinsky 1971). Whereas estate management treatises were prepared for the lord or

50 A History of Management Accounting his steward, there are also known to be at least 20 surviving medieval treatises detailing the preparation of accounting data which were directed at clerks and auditors (Oschinsky 1956: 93). The fi rst printed book on DEB published in England appeared in 1543 (Oldcastle 1543), but it was in the seventeenth and eighteenth centuries that the publication of accounting treatises blossomed (Edwards 2011a, 2011b). To provide further insight into the contribution of accounting to estate management, this section contains a study of a number of relevant texts written and published during a period—1660–1788—when landed estates continued to dominate wealth production, when merchants were extending British trade and influence world-wide and, by the end of which, the country was undergoing the social and economic transformation wrought by industrialisation. It is not contended that the accounting literature of this, as with any other period, can be equated to accounting practice. The books examined have a strong normative flavour, but they also claim to portray systems in practical operation. Therefore, it might be reasonable to assume that they are tolerable surrogates for the ‘real thing’. This is of course a contentious proposition. Whereas Harvey (1994: 93) draws attention to the role of treatises and formularies in achieving ‘extraordinary uniformity’ in early manorial accounting, Fleischman and Tyson (2004) have shown that Thomas Affleck’s ‘how to do’ book on accounting at slave plantations was never put into practice in either the manner or to the extent Affleck advocated. It is therefore relevant to consider the background of the authors of the texts studied here in order to gauge the likelihood of any correlation between theory and practice. The 14 treatises examined (see Table 3.1) were penned by 13 authors whose decision to write about accounting on landed estates might signal an involvement with such institutions. Among the five teacher-authors, a connection is quite likely in the case of Donn whose career also encompassed work as a mathematician and surveyor (Baigent 2004). Hamilton had direct experience of business through involvement in the management of his father’s paper mill (Bywater and Yamey 1982). Snell practiced as an accountant and this might have brought him into contact with the landed class. Little is known about Lazonby, while Stevenson (1762: preface) engagingly admits, ‘I am at a Loss upon that Subject, as I never had an Estate of my own to manage, nor ever had the Management of one for another, and I could not meet with any Gentleman who kept his Accots. in the Manner I proposed’. One might imagine an association with land in the case of Abraham Liset who styled himself ‘gentleman’, while the six remaining authors certainly had direct knowledge of estate accounting and/or estate management. Stephen Monteage (who wrote separate books demonstrating the use of CDA and DEB on landed estates) was initially a merchant but, after the Restoration of the monarchy in 1660, he became a steward in the service of the second duke of Buckingham (Melton 2004; see also Bywater and

Estate and Farm Accounting 51 Yamey 1982: 127–130). His fi rst book, at the time circulating in manuscript form, ‘caught the eye of the scrivener bankers Robert Clayton and his partner John Morris, who brought Monteage into their mortgage banking operations and estate management’ (Melton 2004). After ‘many years of close involvement in all aspects of the scriveners’ elaborate hierarchy of fi nancial operations, Monteage published the fruits of his experience in 1683 as Instructions for Rent-Gatherers’ Accompts’ (Melton 2004).8 North (1714) is known to have ‘lived the life of a country gentleman’ (Parker 1997: 33) and addressed his peers as follows: ‘I write not to Artists,9 but only to Persons of considerable Degree and Fortune’ (North 1714: 10). North (1714: 75) claims to describe ‘the several Methods of Accompt, which I have observed in use, from the meanest to the greatest Estates and Dealing’. George Clerke (c.1712: title page) describes himself as ‘Steward to a person of quality’, while Edward Laurence and Thomas Lovett were land surveyors. Corbyn Morris interested himself in accounting matters ‘Upon becoming possessed of a small patrimonial landed estate’ (Morris 1759: i). We can therefore conclude that a good number of the authors whose works are studied here were describing systems that they had seen in operation or, from their knowledge of how estates operated, believed to be the best way of doing accounting in that locale.10 Table 3.1 Author Abraham Liset

Authors and Occupations Title and place of publication

Year

Amphithalami, or, the Accomptants Closet 1600 Being an Abridgment of Merchants-Accounts Kept by Debitors and Creditors. London

Occupation* Gent.

Stephen Debtor and Creditor Made Easie. London 1675 Monteage

Merchant

Stephen Instructions for Rent-Gatherers Accompts. 1683 Monteage London

Merchant (Monteage 1675)

Thomas The Gentlemans Auditor: or a New and Richards Easie Method for Keeping Accompts of Gentlemens Estates. London

Unknown

1707

Charles Snell

Accompts for Landed-Men: or; a Plain and c. 1711 Teacher Easy Form Which They May Observe, in Keeping Accompts of Their Estates. London

George Clerke

The Landed-Man’s Assistant; or, The Stew- c. 1712 Steward to a person of quality ard’s Vade Mecum. Containing the Newest, Most Plain and Perspicuous Method of Keeping the Accompts of Estates. London Continued

52 A History of Management Accounting Table 3.1

Continued

Roger North

The Gentleman Accomptant: or, an Essay to Unfold the Mystery of Accompts. By Way of Debtor and Creditor, Commonly Called Merchants Accompts. London

1714

A person of honour

Edward The Duty of a Steward to His Lord, RepLaurence resented Under Several Plain and Distinct Articles. London

1727

Land surveyor

Thomas Merchants Accounts: or, the Italian Lazonby Method of Book-Keeping. York

1757

Schoolmaster

Corbyn Morris

1759

Customs administrator and economist (Murdoch 2004)

A Plan for Arranging and Balancing the Accounts of Landed Estates. London

William Book-Keeping by Double Entry. Edinburgh 1762 Stevenson

Teacher

Thomas Lovett

Treatise on Estate Management. [unpublished manuscript]

c. 1770 Surveyor (Lovett c.1770: 16)

Benjamin Donn

The Young Shopkeeper’s, Steward’s, and Factor’s, Companion: Containing . . . A New and Expeditious Method of Keeping a Set of Books, in a Retail Trade, by Double Entry, 2nd ed. London

1773

Robert An Introduction to Merchandise [containing] 1788 Hamilton Book-Keeping in Various Forms. 2nd ed. London

Teacher (Donn 1765)

Professor of philosophy

Note: * Taken from title page of the book except where otherwise stated.

The 14 texts display considerable diversity concerning recommended accounting practices. This is unsurprising as, among the inter-related factors affecting the appropriate content of the accounting records, are: their intended purpose; the nature of the activities being recorded and reported upon; and the status of the individual maintaining the accounting record. These texts sometimes fail to state, explicitly, the purpose of the accounting system, the activities undertaken (though these can often be inferred from the content of numerical illustrations), or precisely who is making the record, though one can be fairly certain it was the steward or agent for the benefit of the landowner. These limitations on our ability to interpret successfully the significance of their content are acknowledged. The idea that an accounting system for landed estates should help keep track of resources belonging to the landowner is uncontroversial.11 The requirement that accounting information should also prove useful

DEB

CDA

CDA/DEB

yes yes yes dr/cr yes

no no n/a no n/a no no

no yes rs/ps** no

no no n/a no n/a no no

Cash book

Clerke c.1712

yes

Cash book

Snell c.1711

yes yes

no yes n/a yes n/a

no yes dr/cr yes

yes yes yes yes yes no

DEB

no no

no no n/a no n/a

yes no3 n/a4 yes

yes

bilateral

CDA

yes no

no no n/a no n/a

no yes dr/cr no

yes

bilateral

CDA

North Laurence Lazonby 1714 1727 1757

yes no

no no n/a n/a yes

yes yes rs/ds*** yes

yes

bilateral

CDA

Morris 1759

yes yes

yes yes n/a yes n/a

no yes dr/cr no

yes yes yes yes yes no

DEB

yes no

no no no n/a no

yes yes dr/cr no

yes

bilateral

CDA

Stevenson Lovett 1762 c.1770

no yes

yes no n/a yes n/a

no yes dr/cr yes

no yes1 yes yes yes yes

DEB

Donn 1773

Notes: [1] Described as a waste book, it is in typical journal format; [2] Final page of book separately demonstrates ‘a Shorter way for a Gentleman’ to keep his rent receipts in tabular form; [3] Contains individual lists of receipts and disbursements analysed by type; [4] n/a signifies not applicable; [5] Analysis appears in build-up of journal entry detailing the credit to capital account; [6] Accruals remain the responsibility of the steward; [7] A separate calculation is made based on the information contained within the accounting system. *=debtor/creditor; **=receipts/payments. ***=receipts/disbursements

CDA presentation vertical vertical DEB Waste book no yes no Journal no no no Ledger yes yes yes Profit and loss account yes yes yes Balance sheet yes yes yes Rent roll or equivalent no no yes yes Presentation features Tabular in part no no yes no2 Bilateral cash book yes yes yes yes Cash book headings dr/cr* dr/cr dr/cr dr/cr Operating flows analy- yes yes yes yes5 sed by type Asset recognition and accruals within accounting system Properties yes yes no no Personal belongings no no no no Ships yes yes n/a n/a Stock of animals/crops no yes yes no Stock of minerals and no n/a n/a no timber Rent in arrears no no yes no6 7 Gain or loss reported yes yes no yes

DEB

Liset Monteage Monteage Richards 1660 1675 1683 1707

Content of Texts

Accounting system

Table 3.2

Estate and Farm Accounting 53

54

A History of Management Accounting

for managerial purposes imposes additional demands, and the remainder of this section considers the extent to which systems recommended in the literature were capable of fulfilling that role. Concerning the nature of activities undertaken, we have seen that there were time periods when landowners mainly rented their properties and others when direct farming played a large role. One might expect that the farmer would require a more elaborate accounting system than would the rentier.12 Direct farming entailed decisions about such things as: what livestock to keep; what crops to plant; and whether to exploit woodlands above the surface and minerals underground. In contrast, the amount of rent receivable would be known in advance, though subject to adjustment following periodic review. The texts studied advocate a range of different accounting systems to record and report the fi nancial affairs of landed estates. Five recommend the use of CDA compared with six that advocate DEB. Two consider that accounting requirements could be satisfied by maintaining only a cash book, while Richards (1707) favoured a hybrid system that employed CDA to provide the data inputted to a ledger based strictly on DEB principles. The purpose of the following exposition of the content of the treatises is to demonstrate their utility for performance assessment purposes. There is no strong focus on the relative merits of the alternative structures, though an element of comparison is probably inevitable. Table 3.2 draws together some of the salient features of thirteen13 of these texts to inform discussion.

4.1. Overall Focus All textbook illustrations deal with the collection of rents, and most also recognise the need to measure farming transactions. Indeed, Monteage (1683: 8, emphasis added) provides an insight to the changing role of managers on a late seventeenth-century estate, and how this affects the nature of their accountability, when explaining, My Purpose is here to present you a mixt Accompt of a Rent-Gatherer; who also manages a Stock of Cattle, Sheep, &c. upon Lands in hand: A thing which happens upon most Estates, since the Fall of Land [values] in every County. Four publications (Monteage 1675, 1683; North 1714; Morris 1759)—two illustrating CDA and two DEB—contain detailed treatment of the fi nancial implications of direct farming. As today, accounting narratives were typically accompanied by illustrative material with Monteage’s dealing with the affairs during the year to Michaelmas 1683. This accounting date was unusual, with Lady Day14 more commonly used ‘because Tenants most usually enter upon Farms at that Season of the Year; And Gentlemen of the greatest landed Estates who are called by parliamentary or other Business to London in the Winter, generally return between Lady-Day and

Estate and Farm Accounting 55 Midsummer to the Country’ (Morris 1759: 18). The remainder of this section surveys the ways in which these texts saw accounting systems as providing landowners with information useful for purposes of performance assessment and decision making.

4.2. Periodic Inventories and Asset Valuation A key signal of a capitalist mentality is identification of the owner’s capital investment (Bryer 2000a, 2000b). An inventory of possessions is standard, though not invariable, practice when opening a DEB-based ledger. For example, Stevenson (1762) starts with an inventory of Sir James Laird’s personal estate which includes household items (furniture, jewellery and plate) as well as animals, crops, loans, debtors, rents outstanding and amounts owing. It does not include property valuations. This was also a practice sometimes advocated in treatises on CDA. The Duty of a Steward to his Lord includes an example of the important exercise Laurence (1727; 15 see also Lovett c.1770: 17–21) would have undertaken in his role as surveyor to determine rental charges. A ‘survey’ of all the farms in the manor records, for each of them, the various pieces of land comprising each farm and, for each piece of land: the number of acres occupied; and whether it is arable enclosed, common arable, pasture or meadow. Then, based on a rate per acre which differs according to the type of land surveyed, the yearly value of each piece of land is stated as well as that for the farm as a whole. New values differ from the old because of ‘improvement’ resulting from initiatives mounted by the steward (Laurence 1727: 95). The stated aim is to produce a figure for rent which is fair to both landlord and tenant (Laurence 1727: 95). Consequential increases in rentals provided English landlords with an incentive to improve their properties, marking them out as different from their continental counterparts (Habakkuk 1953). Oldroyd (2007) reveals that the anticipated increase in future cash flow provided a sufficient incentive for William Cotesworth, of Gateshead, who ‘rose from the ranks of tallow chandler to landed gentleman in around ten years’, to enhance his estate (Oldroyd 2007: 10, 23). The accounting system recommended by the self-styled ‘Steward to a person of quality’, George Clerke (c.1712), also commences with an inventory of the lord’s estate. Such surveys were an important source of information in managing the estate and, indeed, in fi xing a sale price. As Scorgie (1996: 240) points out, ‘Since time immemorial, the generally agreed value of land has been based on its yield’, and he provides numerous examples, from the fi fteenth and sixteenth centuries, showing that 20-years purchase was a common multiple. In Clerke’s illustration, tenanted properties in each of three manors and a parish are valued at ‘20 Years Purchase’ (Clerke c.1712: 2) of the annual rentals.16 The grand total is described as ‘the Value of my Estates and Lands’ (Clerke c.1712: 12), to which is added ‘ready Cash’, stocks of animals and grain, arrears of rent and loans, and from which is

56

A History of Management Accounting

subtracted borrowings. Although the inventory plays no further part in Clerke’s cash-based accounting system, it does supply the lord of the manor with a measure of ‘The total Value of my Estate’ (Clerke c.1712: 14). Turning to a DEB-based system of accounting for landowners, in his ‘Essay on book-keeping, as applied to the business of a steward’, Donn (1773: 18–33) makes the case for maintaining a capital account by pointing out that, where a steward is required to ‘conduct his Books without an Account of Stock’, he is being ‘considered a Kind of Factor’, and ‘the Lord will lose the Satisfaction of feeling the real Value of his Estates’ (Donn 1773: 18). Donn therefore recommends that the steward should be required to account in the manner of a merchant’s clerk. That is, the steward should maintain entity-based accounts conforming to ‘the true Italian Principles’ (Donn 1773: 18). To make the recommended system of DEB operational, an opening valuation is placed on fi xed properties as well as on animals and crops. The need to measure profit for the purpose of performance assessment created an obligation to undertake subsequent asset valuation exercises. For example, Donn (1773) includes crops and livestock at valuations while Monteage (1683: 10, 24) measures livestock for inclusion in an accrualsbased CDA in two different ways: opening livestock unsold is valued at the brought forward figures (some at cost and others at valuation) while valuations are placed on the lambs and calves born during the year that remain unsold. In an illustration in Morris (1759: 18), the balance of stock unsold is ‘assigned by a fair Valuation’.

4.3. Accruals Accounting, Profit Measurement and Performance Assessment One of the conventional arguments for using DEB rather than CDA is because it employs accruals accounting. Table 3.2 reveals that this not to be an utterly reliable criterion for distinguishing between the two systems. In his CDA-based simulation of a real-life situation, Monteage (1683: 20) makes clear his conviction that adequate accountability needs to go beyond cash accounting: But though this [cash based] Accompt thus stated, may be fairly copied, and given to your Lord; yet this is not the Accompt he ought to be satisfied with, especially to the Charge: For what cares he to see how and in what Parcels each Tenant paid his Rent? That which will better satisfie him, is to see at one view each Tenant’s Accompts, charged and discharged; and what remains due by any of them. To address these needs, the scheme advocated by Monteage (1683: 11) embodies accruals accounting in a number of significant ways. A central accounting record is the annual rent roll which, for the Mannor of Grub-Street, totalled

Estate and Farm Accounting 57 £592. For reporting purposes, these rental entitlements are set in a tabular format which contains exactly the same information as would appear in double entry based ledger accounts: the opening balance owing, amount due for the year, amount received, closing balance owing and ‘Lands in hand’. The last item (totalling £184) reveals the opportunity cost to the landowner of five ‘unlet’ properties which he farmed himself (Monteage 1683: 23; see also Clerke, c.1712: 48; Morris 1759: 25; Lovett c.1770: 22). Turning to the record of the farming activities of John Morewood, ‘Receiver of the Rents and Profits of the Mannor of Grub-Street; and Stock thereupon’, the opening ‘Stock upon the Ground of Lean Cattle, &c.’ (Monteage 1683: 12) is valued at £150, with some items stated at cost and others at a valuation. The recommended record also provides details of proceeds arising from the sale of ‘each Part of the Stock’ (Monteage 1683: 24): oxen; cows; bullocks; weathers; ewes and lambs; pigs; butter and cheese; calves; wool; and colt (Monteage 1683: 25).17 Having ‘particularised’ details of the rent, animals, and so on, Morewood draws upon them to provide ‘a fi nal Demonstration and Ballance of the whole Years Transaction’ (Monteage 1683: 25). The charge and discharge statement is presented in vertical format (see Figure 3.1). The charge consists of • arrears of rent at the beginning of the year; • total rent due for the year; • casual profits from sale of wood, from amercements (penalties) and copy-hold fi nes; and • the ‘stock’ of animals, with sales proceeds reported for animals sold (cost shown inset) and those unsold reported at the figures brought forward. Valuations are placed on the ‘Increas’d’ stock, namely lambs and calves born during the year that remain unsold. The discharge consists of ‘yearly payments’, for example salary of Morewood and the poor rate; ‘uncertain payments’, for example cost of keeping Courts, hedging and ditching and a carpenter’s bill; cattle—payments for hay, and for purchasing 100 sheep and 19 bullocks; ‘ready money’ paid over to the lord of the manor; and the closing balances consisting of loss of rent due to death of one of the tenants; land in hand; rent arrears; amount owing for wood sold; and the figure for unsold livestock (also recognised under the ‘charge’). Monteage (1683: 28) discusses the content of the accruals based charge/discharge statement and explains the advantage of this form of presentation: ‘Let the Bayliff be fully charged not only by what he hath received, but by all else given him in charge; and there is no fear, but he will hammer out his Discharge’. The CDA clearly serves as a statement of stewardship, and it is one encompassing the agent’s obligations based on full fi nancial accountability unconfi ned to cash transactions. It also

58 58

A History of Management Management Accounting A History of Accounting

Abstract of the Accompts of John Morewood, Receiver of the Rents and Profits of the Mannor of Grub-Street; a nd Stock thereupon: Viz.

CHARGE 11682. Sept. 29. 1683. Sept. 29. Casual Profits.

I s d

To Arrea rs then due, as by Particulars in the First Column, Page 23. To the Years Rent-Roll of that Estate, as by the Second Column, Page 23. To Sale of Wood, as by a Bill of Particulars given to my Lord. Receivec by Amercements, Receivec by Copy-hold Fines,

The Accompt of Stock thereupon is as followeth Given in Charge /. s. d 14 Oxes cost, 12 Cows, 6 Bullocks, 20 Weathers, 56 Ewes, 1 Colt, 10 Pigs, 1 Bull, 1 Ram,

Valuation of Stock u isold

49 36 15 9 28 1 6 3 1 150:

Rest unsold

Increas'd

0: 0: 0: 0: 0: 15: 0: 15: 10: 0:

0 0 0 0 0 0 0 0 0 0

14 Sold 5 6 20 56 1 10 8 Calves sold Wool sold Butter and Cheese sold

42 0 0 592 0 0 87 17 0 1 4 11 14 7 6

Sold for /. s. d 76 22 21 14 50 3 12 7 7 22

7 Cows valued 1 Bull 1 Ram 10 Lambs, besides 30 sold 2 Calves, besides 8 sold

15 0 7 6 16 8 17 0 4 0 5 0 15 0 18 0 10 0 13 10

21 0 3 0 1 5 2 10 1 10

240: 2

0

29: 5

0

0 0 0 0 0

Total Charge

/.1006: 16 5

DISCHARGE Salary to my self, Salary to the herdsman, A Years Quit-Rent, The Stewards Fee, The Poor Rate, 52 Weeks at 8d.

s 20 0 8 0 13 6 2 0 1 14

d

Yearly Payments

Uncertain Payments

A levy for the Church, Two C'nstables Levies, Charges of keeping Courts, Twelve Mon. Tax on the Rents 592/. at 9d. per pound, Paid a Bill for Hedging and Ditching, Paid a Bill for Repairs, Paid another for Carpenters Bill,

1 6 1 13 1 5 22 4 8 11 12 2 5: 16

8 4 0 0 0 4 0

Cattle

Paid for three Loads of Hay, Paid for 100 Sheep at 8s. each, Paid for 19 Bullocks at 31. each, Charges of driving,

2 10 40 0 57 0 1 15

0 0 0 0

Ready Money to my Lord, and by his Order

23 1 28 26 23 3 24 16 10

50 0 50 0 100 0 50 0 43 0 15 0 50 0 20 0 34 19

0 0 0 0 0 0 0 0 4

/.

/. s.

45:

1

A

52: 18

A

101: December 1682. March, Ditto 1683. April, May, June, Ditto, August, November,

Lost by Barth. Cutler's Death, part of5thColumn, As by the 6th Column, Page 23. Of Rent, as by the5thColumn, Of Wood, 87/. 17s.: Of which receiv'd 23/. 10s. Id. Rest due, Of Cattle unsold, as in the Charge, besides the New Stock aforesaid,

5

0

412: 1£: 4 612: A 0

Thus for the Costs Lost Land in hand Arrears to be charge d on next Accompt

d

0 0 8 0 8

11: 1: 0 184: C : 0 106 64 29

0 6 5

0 5 0 199: 11 5

Which evens the Charge

/.1006

16 : 5

Figure 3.1 Charge and and discharge statement. statement. Note: Before the decimalization of British currency, there were 12 ‘old’ pence (d.) to the shilling Note: (s.) and 20 shillings to the pound sterling (l. or £). £). Source: Monteage (1683: 24–25).

Estate and Farm Accounting 59 provides much more. The principal is able to discern information relevant for performance assessment. Indeed, in numerous respects he has all the usual benefits of being able to review income and expenditure rather than only receipts and payments. Moreover, he can compare these figures with those for previous years and is advised of the manor’s worth to the extent it consists of the value of stock and amounts receivable. The charge/discharge statement does not contain a statement of profit or loss but, in a separate calculation, Monteage (1683: 32) sets out the accruals-based income and expenditure relating to ‘Stock’ (livestock) and ‘Lands in hand’ (the cost the unlet land). The outcome is a deficit of £67 3s. which ‘wants to make up the Charge, which is clearly lost’ by choosing to farm five of his properties (Monteage 1683: 32). Monteage appears relaxed about the level of the deficit: ‘And ‘ ’tis well the Loss is no greater than 67l. I have seen otherguess [different] losing Accompts in keeping Lands in the Lord’s Hands’ (Monteage 1683: 32). Morris (1759: 10) is also dissatisfied with cash book based accounting, because transactions ‘are all blended together without Assortment . . . [and] the Total Amount of the gross Receipts or Disbursements from any Branch is not obvious to the Landlord’. A much fuller record appears in an ‘Entry book’ which shows, separately, the transactions for each of the various ‘Branches of the Estate’, with inflows on the left hand page and outflows on the right. Income is shown ‘gross’ (see Figure 3.2), not only in the case of rents (i.e. the total receivable for the period) but also from exploiting the produce of the land at a lead mine on Antry Moor, a coal works on Lee Heath and from Langley Woods (i.e., for each of these activities the sales value of produce extracted during the year is presented). This enables the fictitious landowner, Henry Seymour, to review ‘the Branches both of fixed Rent and casual Produce, which would otherwise fall into separate Cases . . . ascertained in the same uniform Manner’ (Morris 1759: 19).18 Transactions are finally summarised in ‘An Abstract’ which ‘exhibits a succinct State of all the Branches in the Period given’ (Morris 1759: 26). It does this by taking the information from the entry book and presenting it as a tabular charge/discharge statement. The presentation of rentals in this manner has been discussed above, so the focus here is on an example (income from the coal works on Lee Heath) of ‘casual produce’ to demonstrate the range of information made available in the entry book when read in conjunction with the charge/discharge statement. For ease of presentation, the information provided for the coal works on Lee Heath is set out in vertical format (see Figure 3.2) rather than the tabular presentation employed by Morris to facilitate comparisons to be made between the various ‘branches’ of activity. The following information can be gleaned from Figure 3.2 relevant to performance assessment as well as personal accountability: • Coal in the hands of the agent at the beginning of the period stated at an estimated value which appears to be last year’s selling price

60 A History of Management Accounting Accounting A History of Management ed into that sold and •• Quantity of coal raised during the year classifi classified and the balance remaining in stock at the end of the period •• ‘Gross Income [created] in this Period’ as the result of valuing coal coal raised during the year at selling price •• ‘Gross Receipts’ from sales, with quantities of opening stock sold and and coal extracted during the year sold separately identifi ed identified •• Proceeds from the opening stock of coal sold, distinguishing between between the opening carrying value and the extra revenue arising from from the rise in selling price during the year

ENTRY BOOK: GROSS RECEIPT Branch of the Estate COAL-WORKS on LEE-HEATH John Humphries. Agent for Henry Seymour Esq. Coal raised in the Period, viz. 2200 Tons: Whereof sold 1800 Tons, at 7s per Ton Unsold 400 Tons estimated at the End of this Period, at 7s per Ton Gross Receipt and Steward's last Balance Arrear of Stock being 250 Tons of Coals, left under the Care of John Humphries [steward] at the Commencement of this Period, then estimated at 6s. 8d. per Ton Then [25 March 1759], and before received of John Humphries for Coals sold during this Period, viz. 250 Tons old Stock , At 7s. per Ton, as per his 1800 Tons this Year's Stock ' Monthly Accounts, 2050 Tons ENTRY BOOK: DISBURSMENTS Repaid to John Humphries one Half Year's Land-Tax by him paid, due at Lady-Day 1758 as per Receipt Repaid to John Humphries one Half Year's Land-Tax by him paid, due at Michaelmas 1758 as per Receipt Then [25 March], and before repaid to John Humphries one Year's Poor's Rate by him paid, due at Michaelmas 1758 as per Receipt Then [25 March], and before repaid to John Humphries for Tools, Engines, Repairs, &c. by him paid during this Period, as per Receipts

Gross Income in this Period £. s. d 630 0 0 140 0 0

£. s. d

770 0 0 Gross Receipt in this Period £. s. d

83 6 8

717 10 0

£.s. d 4 0 0 4 0 0 }

90 0 0

2 0 0 80 0 0

ABSTRACT. Charge upon each Branch during the period Arrears at the Commencement of this Period John Humphries. Agent for Henry Seymour Esq. Increase of commencing Arrears during this Period Gross income in this period TOTAL

£. s. d 83 4 770 857

6 3 0 10

8 4 0 0

ABSTRACT. Discharge of each Branch during the period Taxes charged to the Landlord Repairs and other Burdens Net receipts from the productive Branches Arrears at the end of this Period

10 80 627 140

0 0 10 0

0 0 0 0

Figure 3.2 3.2 Coal Coal works works on Heath in Entry Book Abstract, year Figure on Lee Lee Heath in Entry Book and and Abstract, year to to LadyLadyDay Day 1759.* 1759.* Note: *Most dates omitted Source: Source:Morris Morris(1759: (1759:14–15, 14–15,25). 25).

Estate and Farm Accounting 61 • Disbursements • An accruals-based net profit figure for the period, reported under the heading ‘Net receipts from the productive Branches’ Turning to systems of DEB-based estate accounting, Donn (1773: 19) naturally draws attention to the purpose of the profit and loss account as being ‘to see how much the Estate has gained on the Whole’. A greater level of analysis is expected by North (1714: 87) who encourages ‘Persons of Quality and Fortune’ to adopt DEB because they ‘have as many Branches in their accomptable Business, as most Traders have’. A ‘Cash-Accompt will not serve the turn’, whereas DEB enables a gentleman to willingly know at all Times, what every Tenant owes; what the Discompts are upon his Farms, and the net Payments of Rent; how Interest goes; whether he receives, or pays more; and what is due either way; how his Steward’s or Bailiff ’s Accompt stands; what his Managery of Corn, Grazing, Dairy, and Sheep yields him; and in general, at one, two, or three, &c. Years end, whether his Estate advances, or is Retrograde, and by how much. (North 1714: 87; emphasis added) North’s conviction that estate accounting should be based squarely on the principles of DEB may possibly be traced to his brother Dudley who was an extremely successful Levant merchant (Grassby 2004; Parker 1997: 46–47). We can therefore fi nd here further evidence of a DEB-based system of estate accounting carefully designed to provide activity-focused information relevant to performance assessment (see also Hamilton 1788: 489), even if the implication that such information is unavailable under CDA is misguided.

4.4. Distinguishing Capital from Income An early published demonstration of accounting for landed estates using DEB is Abraham Liset’s Amphithalami, published in 1660. Liset’s illustrative accounting system focuses on the affairs of the fictitious Sir John Ireland who was a merchant as well as a landowner. A careful distinction is made between capital and revenue. For example, there is removed from the ‘Several ships at sea’ account, a loss of £5,700 (initial carrying value plus cost of fitting out the ship for its voyage) that resulted from ‘the Fortune, [being] taken in her Voyage to the Levant by the Spaniards’. This enabled the operating profit generated by the remaining two ships to be identified19 and transferred to the ‘Gain and loss’ account. Lee (1981: 544) speculates that Francis Willughby’s accounts (1672–82) may have been based on the model outlined by Liset, given certain similarities and the fact that it was ‘the only known English book available’ at the time which applied DEB to account for an estate.

62 A History of Management Accounting Hamilton (1788: 489) also addresses the action required to distinguish between capital and income for the purpose of computing ‘gain or loss’. Concerning the treatment of what would today be called capital expenditure, support for accruals accounting takes a further dimension: ‘If a sum of money, suppose L.500 be expended to improve the farm, which the proprietor does not expect to draw back in less than 10 years’ then L.50 should be written off each year ‘till it [the balance] be exhausted’ (Hamilton 1788: 490). Hamilton (1788: 491) emphasises the importance of matching costs with related revenues: ‘If no returns be expected for several years, the allowance is not diminished till the time when benefit was expected’. The amount written off each year, however, should take no account of the new venture’s level of profitability: This [accounting], however, should be regulated by the hopes entertained when the money was expended, and not by the success of the improvements; and then the balance of the farm-accompt, in successive years, will show how far the improvements have exceeded or fallen short of expectations. (Hamilton 1788: 490) The subject of what later became described as ‘deprecation’ also receives attention from Monteage (1675) and North (1714). Monteage’s illustration of estate accounting, based on events at Grange Farm, contains an entry for ‘Horses’ a/c, by loss and gain, lost by their use’ (Monteage 1675: ledger p. 4). North’s pro forma set of accounts contains a full opening inventory of property covering jewels, plate, watches, curiosities, library of books and furniture, pictures, ordinary furniture of the house, bricks made, timber and wood felled. These items comprise what Monteage refers to as the ‘dead stock’ (in contrast to the livestock), and their initial value is recorded in a ledger account which is increased by the cost of items purchased during the year and reduced by the proceeds from items sold. It appears that a new valuation is made at the year end to create the balance of £100 written off in the profit and loss account (North 1714: 241–242).

4.5. Transfer Pricing A concern with performance assessment in recommended forms of accounting for landed estates is further highlighted by evidence of action taken to extend the role of the accounting system to measure and record internal movements of goods as well as transactions with outside parties. For example, Donn (1773) demonstrates the operation of a system of process costing with unthreshed corn valued, when threshed, for transfer to the granary. 20 Also, the profit and loss account is charged (at cost) with the value of wheat and oats taken by the family from the granary, which action enables a more meaningful figure for entity-based profit. Hamilton (1788: 489) also believes that revenue should be recognised, not only when produce is sold,

Estate and Farm Accounting 63 but also through valuations placed on items ‘sent to the granary and transferred to accompt of corn, or delivered for the use of the family’. The next sub-section reveals recognition of the role that tabular presentation might play in the communication of useful information for performance assessment purposes.

4.6. Tabular Presentation A notable feature of Clerke’s cash book–oriented text is the effective use of tabular presentation. Tables are used to present, in comparative format, monthly cash inflows and outflows elaborated to disclose the main components of each month’s receipts and disbursements (Clerke c.1712: 46–47). It has been noted that Monteage (1683) presented data for rentals, in tabular form, equivalent to that which would appear in accruals-based ledger accounts. Clerke (c.1712: 48) repeats this practice, though employing a rather fuller illustration, and concludes by explaining the relationship between the nine columns of the tenant’s tabular account in the form of a ‘Proof’ of the figures. Clerke (c.1712: 49) underlines his awareness of the value added by accruals-based data for other flows of resources when observing: ‘I might add an Accompt Sales of each Part of the Stock, Cattle, Corn, &. what Sold, Encreas’d, and what Remains, but being easie to be drawn, I leave it to your Discretion’. As noted above, the tabular format also features prominently in the accounting system recommended by Morris (1759: 25) with the revenues, expenditures and ‘Net receipts from [each of] the productive Branches’ of the estate presented in that manner (see Figure 3.2). Support for tabular presentations expressed by advocates of CDA, such as Monteage and Morris, is the subject of uncompromising criticism from the prominent promoter of DEB, Roger North. But although North (1714: 261–262) rejects their utility for presenting fi nancial information, he nevertheless agrees that ‘Tabular Arithmetick . . . serves to bring a world of Accompts into a little room’. Perversely, North (1714: 261) recommends the ‘Tabular Method of keeping a Check upon’ work performed by labourers. Its potential for the effective control of labour is explained in full (North 1714: 263): The Knowledge that such an Accompt as this is kept, is sufficient to keep Men to true Reckoning, lest they loose their Credit and their Work; but it helps very much also in other Respects; for if it be duly distinguish’d. as to the Taken or Day Work, it gives a true Accompt, what the Men can do; and Bargains may be made with them by Lump, or Measure accordingly; the doing which reasonably and well, is the greatest Difficulty in Country Business; the Men that work, know exactly; but those that employ them, cannot know any thing of new Work, nor commonly put out, but by some such Means as this; so the Advantages of Workmen is very great; and as they fi nd the Master Ignorant, they will

64 A History of Management Accounting propose outragiously, which nothing corrects, but a Demonstration, that they and their Work are understood.

4.7. Budgeting The unpublished treatise penned by Thomas Lovett (c.1770), chief agent on the Chirk Castle Estate, is of particular interest because it takes a leap forward, in terms of accounting for management, by recognising accounting’s potential for planning, coordinating and controlling farming activity. His treatise contains a detailed budgeting exercise undertaken to help decide whether it was worthwhile farming, in a particular manner, 400 acres of land (Jones 1985: 63–72). The main stages involved in the analysis are as follows: 1. Land is allocated between growing various types of crops, hay, and pasturage. 2. The pasturage is allocated between different types of animals—cows, sheep, horses, and so on—based on their acreage requirements. 3. The investment needed to stock the farm with the appropriate number of animals and provide the necessary farming implements is established, with a full build-up provided of each item in the budget. 4. A forecast is made of annual running costs including the rent which must be paid to the landlord, ‘wear and tear in the implements of husbandry . . . and the decay in the dairy utensils’ (Jones 1985: 68). Supporting schedules again show how the main items have been computed. To this total is added an allowance for interest at 10% on capital invested ‘in consideration of his trouble in conducting business and the hazard he runs in the loss of cattle, etc.’ (Jones 1985: 68). 5. Detailed calculations are made of the amounts likely to be received from the sale of crops, animals and their produce. 6. Total revenues are compared with total running costs, including the interest allowance on capital invested, to give the balance of ‘neat profit’. The limitations of this budgeting exercise are clearly recognised by Lovett. Assumptions which have been made are stated and the discussion attached to the numerical analysis fully acknowledges the fact that many of the calculations are ‘mere suppositions’ (Jones 1985: 71). Lovett was of course an advocate of CDA-based estate accounting but this does not blind him to the need for a careful distinction to be made between capital and revenue items. The preparation of an annual profit statement is also central to the budgeting exercise, but no mention is made of a balance sheet which is presumably considered to be of no great significance in this context. Jones (1985: 72) is clearly impressed by Lovett’s budgetary exercise, concluding that it interlinks ‘on a detailed budgetary basis, investment and return. He

Estate and Farm Accounting 65 integrates into the one whole of an income statement, the cash flow results of making a decision to invest in and operate a 400 acre farm for a year’.

5. DISCUSSION AND CONCLUDING REMARKS Those farming the land, whether as lord or tenant, often undertook a range of activities unconfi ned to the strictly agricultural. The estate might also be the site for extracting materials from the land, for example for fuel, and for processing its produce, for example wheat into flour and bread. Chapter 5 reveals that larger farms and landed estates sometimes became quasi-capitalistic enterprises over time, with the outputs from the land used as a means of obtaining income through manufacture and trade with the world outside the manor. Such an estate naturally exhibited many different features from an industrial concern, but there were also numerous similarities. In both cases there was the need to control the activities of agents and employees. Moreover, in an estate of any size, a number of activities were likely to be undertaken, requiring choices to be made and, therefore, causing their relative cost and profitability to be of interest to the owner. 21 There can be little doubt that the landowner was in a quite different position from, say, the merchant in the sense that the opportunity to invest and disinvest capital was more restricted. This difference had clear implications for the role that could be played by an accounting system in informing decision making, but it does not mean that the informational content of each of their accounting systems was entirely different. As the ‘country gentleman’ and writer Roger North (1714: 10) put it: a proper system of accounting, and for him it had to be DEB, ‘will be as profitable to a Man of Estate, as to one of a gainful Profession’. Nevertheless, the system’s contribution is seen to be distinctive in the following important respect: for the latter it helps ‘in getting’ an estate; for the landed gentleman ‘in preserving an Estate’ (North 1714: 10; emphasis added). Implicit in these statements is the assumption that the merchant is starting from an inferior financial position and his occupational raison d’être must therefore be to make money to gain power and elevate his position in society. The main concern of the landowner was to make an effective use of the resources in his possession, but this could involve changes in the use of the property. That meant, in very broad terms, a choice between renting and direct farming; at the direct farming level, between what was done and the way in which things were done; and, increasingly, the extent to which landowners might exploit woodlands above and minerals below the ground. Consistent with our thesis which views the history of management accounting as one of continuity with change, we see the role of management accounting information to have changed over time less than either the precise nature of that information or the type of accounting system employed to collect data for management to peruse. Yamey (1964: 134)

66 A History of Management Accounting points out that ‘the characteristic components of the double-entry system [are] the profit and loss account and the capital account’ while for Bryer (2000a: 159; see also Bryer 1993, 2000b), applying a Marxist perspective, ‘the calculative mentality of modern capitalism’ required the measurement of profit and capital and the development of notions of rate of return that are well served by DEB. Much the same point was made nearly 40 years earlier by Littleton and Zimmerman (1962: 246; emphasis added) who argued that the classification of transactions into those reported in real accounts and those in nominal accounts was ‘highly informative because the interrelation of these accounts made symbolically visible the interaction, under management’s direction, of enterprise capital and enterprise income’. These are valid comments, but it may possibly be the case that the equation of DEB with the kind of information associated with rational economic decision making has, inadvertently, caused under-recognition of the role of its predecessor accounting system—CDA—in the management of ecclesiastical and secular estates. In evaluating the evidence presented in this chapter, it is useful to bring in further comment from Bryer on the significance of accounting for economic development. Bryer (2006a: 370; see also Bryer 1994) points out that ‘In Marx’s theory, England’s agricultural revolution was [in] the vanguard in its transition from feudalism to capitalism’. Marx believed that the revolution ‘took hold’ from around 1670 and was carried through to its conclusion from about 1750 (Bryer 2006a: 368), and this timeframe fits in well with the dating of textbook publications studied here. Whereas, in Bryer’s estimation, the ‘feudal mentality pursued the direct appropriation of surplus labour’, the ‘capitalist mentality pursues the rate of return on capital employed in production by extracting surplus value from the sale of commodities or services produced by wage labour’ and, for this purpose, requires the preparation of balance sheets and profit and loss accounts (Bryer 2006a: 370). The texts studied in this chapter, however, reveal that those advocating the use of CDA also contain evidence of a potential that could go well beyond a narrow stewardship role. Most, but not all, of the texts promoting DEB show how to compile the same kind of information relevant to performance measurement as would be expected from them today. A calculation of profit is a natural outcome from a system of DEB and, in the texts examined, there are usually separate ledger accounts recording profits arising from different activities. This typically required the bookkeeper to attach valuations (cost or estimated) to properties, livestock and crops. There are examples of values being placed on goods taken for personal consumption and threshed corn transferred from the barn to the granary, while Hamilton (1788) reveals the essence of a capitalist mentality (Bryer 2006a: 382) when recommending that landlords write off the cost of improvements to properties over the period of expected benefit. In the ‘balance’ account that rounds off this entity-oriented accounting system, assets and liabilities are valued to

Estate and Farm Accounting 67 enable identification of the landowners ‘neat Estate’ (Donn 1773: 33). But this chapter also reveals that recommended systems of DEB did not always apply the accruals concept to any significant extent (e.g., Richards 1707), nor necessarily do so very well (Stevenson 1762). But although DEB exhibits the potential for routinely providing decision-useful information, it does not follow that such information is necessarily absent where DEB is not in operation. This chapter has shown that, despite the absence from CDA of a profit and loss account per se, this by no means ruled out the possibility of providing (both outside and within the system of CDA) information relevant to performance assessment based on calculations of capital, asset values, sources of revenue and, indeed, profit. Section 3 of this chapter reveals limited evidence of estate accounting practice. As with many aspects of management accounting history there is a need for accountants, and other historians possessing appropriate skills, to identify and examine relevant archival material for further knowledge of the extent to which the ideas of the authors of relevant texts were given practical effect.

4

Merchants’ Accounts

1. INTRODUCTION Heaton (1948: 307; see also Davis 1967: 3; Coleman 1977: esp. Chapter 4) sees a dramatic economic transformation of Britain’s position in Europe during the period of early capitalism which reached through to the middle of the eighteenth century (Chiapello 2007: 265; Sombart 1902): Tucked away in the top left-hand corner of the map of Europe, fi fteenth century England was an unimportant, unfortunate country . . . The picture contrasts strongly with that of the mid-eighteenth century. By 1750 the population had almost trebled and was growing quickly. Commercial agriculture covered much of the country, some grain was being exported, but wool was kept at home by law for use in a cloth industry that was now the largest in Europe. The production of metal goods was highly developed, and coal fi red a wide range of industries. British merchants, using British ships, were fi rmly established in most European ports, in the oriental and African trades, and in every kind of traffic with the Americas. Emigration and conquest had created an empire with thirty transatlantic colonies. The seventeenth and eighteenth centuries saw ‘The commercial revolution [which] has quite rightly been identified with product diversification and the expansion of long-distance trading’ (Ormrod 2003: xiii–xiv) whose ‘consequences were so important, not only for the development of merchant organization and services ancillary to trade, but also in wider fields of capital accumulation and investment’ (Davis 1967: 3). Mercantilism, though not an unproblematic notion (Perlman and McCann 1998), is widely recognised as the prevailing philosophical and economic framework in Britain during this period of rapid economic growth. The term ‘denoted the pursuit of economic power in the sense of economic self-sufficiency. Its underlying idea was to establish the power or strength of the State by making it independent of other States in the economic sphere’ (Lipson 1948: 1). Allied to this was the belief that the state’s

Merchants’ Accounts 69 power depended on its wealth as measured by the amount of precious metals, particularly gold, in its treasury. For countries not naturally endowed with these resources, such as Britain, precious metals could be obtained by conquest or trade. A government’s task was therefore to create an environment within which trade flourished and a nation’s wealth was increased— for example by granting monopoly foreign trading rights to its businesses and instituting protectionist measures designed to discourage imports from abroad. Against this background, the purpose of this chapter is to study the use of DEB1 by merchants for management purposes during the early modern period, with attention also given to the part played by DEB in economic development and the rise of capitalism. From a Marxist perspective, as interpreted by Bryer (2000a: 141), ‘the signature for the social character of capital is double-entry bookkeeping (DEB) employed to provide the means for calculating the rate of return on capital’. Bryer’s study of the place of accounting in the transition to capitalism in England principally focuses on evidence of the use of accounting signatures in practice. Starting with the commercial revolution of the mid-sixteenth century, he sees ‘socialised capital’ beginning the quest to ‘win its freedom from feudal hegemony in overseas trade’; a mission which gained pace a century later with the onset of a bourgeois revolution that saw the emergence of huge international trading companies (Bryer 2000b: 330–331). Bryer (2000b: 345) argues that the ‘formalisation’ of a system of capital accounting at the East India Company in 1621, and the ‘apparent introduction of DEB in the 1630s’, reflected the rise of accounting and accountability associated with the socialisation of capital as the merchant class gained in power. Our principal focus in this chapter will be on whether the relevant accounting literature and practice reveals evidence of the ‘calculative mentality of modern capitalism’ (Bryer 2000a: 141). DEB will be shown to have provided the capacity for assessing the rate of return on capital, though evidence of such calculations being made is sparse (Toms 2010). The main feature of this chapter, therefore, will be to present evidence of English merchants having available to them accounting information which could be used to more effectively manage their businesses. The remainder of this chapter is organised as follows. Section 2 examines the debate between historians concerning the significance of DEB for economic development during the mercantilist period. Next, the results of our study of accounting treatises published between 1547 and 1799 are presented (see Table 4.1). Section 4 examines the available evidence concerning the management accounting practices of merchants and trading companies, and is followed by our concluding remarks.

2. DEB AND THE RISE OF CAPITALISM The relationship between DEB and capitalism during the mercantilist era has attracted interest from historians for more than a century. Sombart

70 A History of Management Accounting (1902) attributed Europe’s rapid economic development from the medieval period onwards to the ‘spirit of capitalism’. Subsequently, Max Weber, Joseph Schumpeter and Walter Eucken shared in the view that DEB was of central importance, perhaps even a necessary condition for giving practical effect to the ‘spirit of capitalism’. The essence of their conclusions, according to Winjum (1972: 23; see also Robertson 1933: 52–56), was that DEB helped to create a new attitude towards economic life wherein the medieval goal of subsistence was replaced by the capitalistic goal of profit. It did this through enabling the measurement of a proprietor’s capital, the calculation of periodic profit, the differentiation of personal and business affairs, and the emergence of the autonomous enterprise through the separation of ownership and management (Winjum 1972: Chapter 2). It was not until nearly half a century after the initial publication of Der Moderne Kapitalismus that the idea that DEB was ‘a causal, or at least predisposing, factor in the development of capitalism’ (Yamey 1949: 100) became the subject of critical analysis. Yamey’s conclusions (1949: 110) based on a study of early treatises, published mainly in England but also elsewhere between 1494 (the date of Pacioli’s Summa) and the end of the eighteenth century, are admirably clear-cut: Accounting practice, judged from the texts, does not suggest the ‘quantification’ of possessions, the comparison of profits and invested capital, and the separation of the owner and his enterprise, which have been mentioned as some of the more important ways in which accounting has contributed towards economic rationalisation. Throughout the period the process of balancing, as Sombart recognised, appears to have served limited objectives of a technical ‘bookkeeping’ nature. Further helpful clarification of Yamey’s position is provided in his Introduction to Studies in the History of Accounting (Littleton and Yamey 1956). There, Yamey (1956: 7) recognises the following attributes of DEB compared with other methods of record keeping: • ‘the records are more comprehensive and orderly’; • ‘the duality of entries provides a convenient check on the accuracy or completeness of the ledger’; • ‘the ledger, including as it does personal, real and nominal accounts in an integrated whole, contains the materials for developing, as part of the system, statements of profit-and-loss and of capital, assets and liabilities’. Yamey (1956: 8–9; see also Yamey 1949: 103) saw the literature of the sixteenth through to the eighteenth centuries as focussing on the fi rst two areas, especially the former (Yamey 1964: 133), hence his scepticism of the force of Sombart’s thesis. 2

Merchants’ Accounts 71 There matters rested until Raymond de Roover (1955: 420) concluded that recent revelations (Melis 1950; Zerbi 1952) ‘show that accounting promoted the development of capitalism because the business fi rm came to be considered as a separate entity endowed with its own capital’. De Roover (1955: 414) argued that it was wrong to assert, as did Yamey (1949: 113), that ‘the striking of balances was performed primarily for narrow bookkeeping purposes’ to the exclusion of managerial purposes such as pricing and performance assessment. He continued, ‘On the contrary, already in the Middle Ages, balance sheets were extensively used for purposes of control—and even for purposes of taxation! In these respects, the evidence afforded by the Medici records is overwhelming and decisive’. 3 Yamey returns to this issue in 1964, dismissing Sombart’s thesis as ‘too elaborate and fanciful’ (Yamey 1964: 119), having earlier (Yamey 1949: 112) acknowledged a single ‘enthusiastic reference’ to the use of accounting for performance assessment purposes—a role that ‘supports Sombart’s thesis in clear terms’—in Wardhaugh Thompson’s Accomptant’s Oracle published in 1777.4 Overall, in the estimation of Yamey (1949: 112; emphasis added; see also Yamey 2000) ‘it would be reasonable to conclude that in general the writers placed no great value on double-entry on account of the subdivision of profit which it made possible’. Against the background of this debate, the following section undertakes a re-examination of early accounting treatises. A range of evidence is presented which demonstrates that early writers did indeed claim that accounting could fulfi l more than narrow bookkeeping purposes.

3. MERCHANT ACCOUNTING LITERATURE It is important that any historical study should assemble evidence sufficient to enable ‘justified statements about the past’ (Napier 2002: 136), even though they might be overturned by the subsequent discovery of new evidence or the reinterpretation of existing evidence. Fleischman, Mills and Tyson (1996: 61) offer a classification of sources of historical evidence, among which, ‘most important for accounting history is communicative evidence, usually taken from written documents’. The use of archival material of this type is nevertheless problematic. Quite apart from the question of what counts as ‘sufficient’ evidence for reaching conclusions based on ‘adequate argument’ (Napier 2002: 136), often only a fraction of that created continues to survive, that which does survive may not be representative of the past (e.g., accounting archives focus more on large companies than small) and the meaning of what has been written down can be interpreted in different ways. Although by no means free from these problems, our database does offer a degree of completeness for our principal purpose, which is to assess whether authors of DEB treatises believed that accounting was decision-

72 A History of Management Accounting useful. We acknowledge the fact that our secondary interest in whether accounting was used by merchants for such purpose requires not only ‘judgements’ (Napier 2002: 140) of the significance of the evidence but, given the limited availability of merchants records (see Section 4), a fair degree of speculation. Our purpose in the remainder of this section is to adduce sufficient evidence to support the proposition that a significant number of writers of DEB treatises considered accounting capable of providing information relevant to the owners’ natural concern to manage their affairs so as to increase the value of, and return on, their capital investment. The selection of the texts for study is based on the content of the bibliography of books on accounting contained in Yamey, Edey and Thompson (1963: 202–204). Excluded are treatises that (1) consist of a single sheet summarising accounts to be debited and credited; (2) from their title appear to contain little by way of accounting or bookkeeping; (3) focus only on the rudiments of the subject; (4) are clearly directed at users other than merchants;5 (5) are designed as general texts on trade and commerce or as young men’s ‘companions’. Where more than one edition of a text was published, the earliest edition contained within either the rare books collection of the Institute of Chartered Accountants in England and Wales or at Early English Books Online (http://eebo.chadwyck.com/home) was used. The 45 books studied are listed in Table 4.1. The fi rst to be published, in 1547, was Jan Ympyn Christoffels’ A Notable and Very Excellent Worke,6 followed by two more books in the sixteenth century, 10 in the seventeenth and a further 32 in the eighteenth century. Yamey (1940: 336) has pointed out that The double-entry bookkeeping system is characterised by the fact that within its structure there is room for a profit and loss account, capital account [then called ‘stock’ account], and balance [or ‘ballance’] account (the forerunner of the balance sheet). The advantages, from a modern point of view, of having these three accounts are that they give the reader in a clear and concise manner information about the present position and past progress of the business. To aid understanding of these three key ledger accounts within a system of DEB, Appendix 4.1 to this chapter reproduces examples taken from the illustrative ledger of a fictional London merchant (King 1717). At the top of each account (see Appendix 4.1) appears the ledger folio number, with the ‘Stock’ account occupying folio 1 of the ledger. It opens (24 October 1715) with debit (‘Debtor’) and credit (‘Creditor’) entries captioned ‘sundry Accounts, as per Inventory’. These balances comprise, respectively, the total values of the liabilities and assets of the London merchant, with the corresponding credits and debits appearing in individual liability and asset accounts which are not reproduced. The numbers to the left of each column of figures in the three ledger accounts cross-reference to the corresponding debit or credit

Selected Treatises on Double Entry Bookkeeping

Anonymous (1776) An Easy Introduction to Bookkeeping. London. Booth. B. (1789) A Complete System of Book-Keeping. London. Brown. T. (1670) The Accurate-Accomptant. London. Carpenter. J. (1632) A Most Excellent Instruction for the Exact and Perfect Keeping of Merchants Bookes of Accounts. London. Chamberlain. R. (1679) The Accomptants Guide, or, Merchants Book-Keeper. London. Chapman. T. (1764) The Merchant’s and Tradesman’s Universal Director and Assistant: Being a New and Accurate System of Merchants Accompts. London. Clark. J. (1738) Lectures on Accompts, or Book-Keeping; After the Italian Manner. London. Colinson. R. (1683) Idea Rationaria, or the Perfect Accomptant. Edinburgh. Collins. J. (1653) An Introduction to Merchants Accounts. London. Cooke. J. (1764) A Compting-House Assistant; or Book-Keeping Made Easy. London. Dafforne. R. (1635) The Merchants Mirrour. London. Dafforne. R. (1640) The Apprentices Time-Entertainer Accomptantly. London. Dilworth. T. (1777) The Young Book-Keeper’s Assistant. London. Dodson. J. (1750) The Accountant, or, the Method of Book-Keeping Deduced from Clear Principles. London. Donn. B. (1775) The Accountant: Containing Essays on Book-Keeping by Single and Double Entry. London. Dowling. D. (1765) A Compleat System of Italian Book-Keeping. London. Fitzgerald. E. (1771) An Epitome of the Elements of Italian Book-Keeping. Whitehaven. Gordon. W. (1765) The Universal Accountant, vol. 2. Edinburgh. Hamilton. R. (1788) An Introduction to Merchandise [containing] Book-Keeping in Various Forms, 2nd ed. London

Table 4.1

*

*

* *

* *

*

# #

§

§ §

# §

§

§ §

§

√

√

√ √

√

√

√ √

√

√

√

√ √

√ √ √ √

√

√

√

√ √

√

√

√

√ √

√

√

√

√

√ √

√

Continued

√ √

√

√

√

√

Contents of Treatises 1 2 3 4 5 6

Merchants’ Accounts 73

Continued

Hamilton. W. (1735) Book-Keeping New Modelled: or, a Treatise on Merchants Accounts. Edinburgh. Hatton. E. (1695) The Merchant’s Magazine. London. Hawkins. J. (1704) Clavis Commercii: or, the Key of Commerce. London. Hayes. R. (1739) Modern Book-Keeping: or, the Italian Method Improved, 2nd ed. London. Jackson. W. (1771) Book-Keeping in the True Italian Form. Dublin. King. T. (1717) A Exact Guide to Book-Keeping by Way of Debtor and Creditor: Done After the Italian Method. London. Liset. A. (1660) Amphithalami, or, the Accomptants Closet Being an Abridgment of Merchants-Accounts Kept by Debitors and Creditors. London. London. J. (1752) A Compleat System of Book-Keeping After the Italian Method. London. Macghie. A. (1718) The Principles of Book-Keeping Explain’d. Edinburgh. Mair. J. (1736) Book-Keeping Methodiz’d: or, a Methodical Treatise of Merchant-Accompts. Edinburgh. Malcolm. A. (1731) A Treatise of Book-Keeping, or, Merchants Accounts. London. Mellis. J. (1588) A Briefe Instruction and Maner How to Keepe Bookes of Accompts. London. Monteage. S. (1675) Debtor and Creditor Made Easie. London. North. R. (1714) The Gentleman Accomptant: or, an Essay to Unfold the Mystery of Accompts. By Way of Debtor and Creditor, Commonly Called Merchants Accompts. London. Peele. J. (1553) The Maner and Fourme How to Kepe a Perfecte Reconyng. London. Roose. R. (1760) An Essay to Make a Compleat Accountant. London. Shires. J. (1799) An Improved Method of Book-Keeping. London. Snell. C. (1701) Rules for Book-Keeping, According to the Italian Manner. London. Snell. C. (1718) The Merchants Counting-House. London. Squire. W. (1769) The Modern Book-Keeper; or, Book-Keeping Made Perfectly Easy. London. Stephens. H. (1735) Italian Book-Keeping Reduced into an Art. London. Stevenson. W. (1762) Book-Keeping by Double Entry. Edinburgh.

Table 4.1

*

* *

*

* * * * * *

#

# #

#

§

§ § §

§

§

√ √

√ √ √ √

√ √

√ √

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√

√ √

√ √ √

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√ √

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1 2 3 4 5 6 √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √

74 A History of Management Accounting

# §

√ √

√

√

√

√ √

√

√ √

√

√

Notes: √ Signals coverage of the topic * Reproduced in the Historical Accounting Literature series except that Dafforne (1640) The Apprentices Time-Entertainer Accomptantly (earliest available edition) is used instead of Dafforne (1670). # Reproduced by Arno Press or Garland Publishing except that Mair (1736—earliest available edition) is used instead of Mair (1793) § No significant content relevant to this study 1. Accounts as a means of establishing financial position 2. Accounts as a means of measuring profitability and changes in financial position 3. Merchandise—designing and constructing the accounts 4. Merchandise—valuing the balance 5. Merchandise—calculating profit or loss 6. Accounts, decision making and uncertainty

Thompson. W. (1777) The Accomptant’s Oracle. vol. 2. York. Webster. W. (1719) An Essay on Book-Keeping According to the True Italian Method. London. Wicks. J. H. (1797) Book-Keeping Reformed; or the Method by Double Entry. London. Ympyn Christoffels. J. (1547) A Notable and Very Excellent Worke. London.

Merchants’ Accounts 75

76 A History of Management Accounting entry in another ledger account. The link can be seen in the three ledger accounts appearing in Appendix 4.1 with the profit ‘gained by one Year’s Trade’ reported as a credit balance in the stock account and as a closing debit balance in the profit and loss account. Also credited to the stock account is a legacy received from the merchant’s father. The closing balance on the stock account of £10,337 6s. 0¾d., captioned ‘what you are really worth, when your Debts are paid’, is carried to the ‘Ballance’ account. The profit and loss account contains detailed information which the London merchant should have found useful for performance assessment and decision making by revealing the outcomes from different types of activity.7 For example, it provides a record of: interest received on loans; amounts ‘gained’ from the sale of different types of merchandise; and the profits from the Flying Eagle8 and a voyage to Galicia. The expenses include interest paid, discounts allowed and a composition with a debtor, the deficit arising from goods lost on a voyage to ‘Gibralter’, the net loss on insurance transactions, charges (such as customs and wharfage) on merchandise, and household expenses. It will also be noticed that the increase in wealth arising from the legacy is reported separately from operating profits; each being transferred separately to the stock account. The Ballance account reports assets in the form of cash, unsold merchandise and debtors, and liabilities in the form of creditors and the ‘Stock’ of the London merchant at 25 October 1716. The remainder of this section shows that the kind of information today associated with accounting rather than bookkeeping9 —namely the preparation of the profit and loss account and balance account, the measurement of results by activity, the valuation of assets and performance assessment and decision making—were the subject of significant treatment in early texts on DEB targeted principally at merchants and bookkeepers. The attention devoted to these areas by the texts selected for study is summarised in Table 4.1.

3.1. Accounts as a Means of Establishing Financial Position According to Sombart (quoted in Chiapello 2007: 267): ‘We could even go so far as to define capital as the capacity for accumulation as assessed through double entry bookkeeping’. This sub-section and the next demonstrate that writers of DEB manuals continuously emphasised the importance of measuring the owner’s capital investment and of monitoring changes in that investment. Many of the texts examined start with a definition of bookkeeping, with Webster (1719: 1; see also Chapman 1764: preface10) believing, ‘Bookkeeping is the Art of stating our Accompts, so as rightly to represent the Condition of our Affairs; to which End, the Italian Manner of Debtor and Creditor, by double Entry, is by Experience found most conducive’. Writers also say why they considered it important to keep accounts: Colinson (1683: 1) considered its virtue to be ‘the satisfaction it gives to men of trade, that in one Instant can see (as he doeth his Person in a mirror) his

Merchants’ Accounts 77 whole estate11 and in what posture it is at the time’; for Malcolm (1731: 1; see also: Hayes 1739: 2; Mair 1736: 2) it was so ‘that the true State of any Part, or of the Whole, may be thereby known with the greatest Clearness and Dispatch’. Phrases such as the ‘Condition of our Affairs’ (Webster 1719: 1), the ‘true State of his Affairs’ (Hamilton 1735: 1; see also: Cooke 1764: iii; Dodson 1750: i; Donn 1775: iv; London 1752: 1; Mair 1736: 1; Stevenson 1762: 13; Thompson 1777: 2), ‘what his gross or free Estate is’ (Hamilton 1735: 1), a ‘just View of my Estate’ (Donn 1775: 5), the ‘Value and Condition of his Estate’ (Stephens 1735: 4) and ‘shewing what one’s free Estate is worth’ (Malcolm 1731: 3) feature regularly, with Jackson (1771: 1, see also iii; Gordon 1765: 21) stating that accounts are kept so ‘that at any Time, we may know the true State of each particular Branch of our Dealings; or of the Whole, with Ease and Dispatch’.12 Hamilton (1788: 285) employs the phrase to ‘exhibit the present state of their funds’, and further comment makes it clear that assets should be valued at ‘current prices’ for that purpose. Treatises published throughout the period studied make it clear that the end product of the bookkeeping process—the balance/ballance account (see Yamey, Edey and Thomson 1963: 114–123)—was considered to be much more than a list of balances remaining after closing the nominal accounts to the profit and loss account. According to Dafforne (1635: 46): ‘In place of the word Ballance, I should rather enter Estate-reckoning: for by drawing the whole Booke to a head, I draw with One an account of my Estate’. Or as Booth (1789: 164) put it, ‘The balance of this [Stock] account should always comprehend the amount or value of your estate, both real and personal’. Indeed, Hatton (1695: 137), Macghie (1718: 1) and Chapman (1764: 13) are agreed that DEB enables the merchant to know ‘what he is worth to a Farthing’ and Hawkins (1704: 1; see also 4), only a little less ambitiously, ‘to a penny’.

3.2. Accounts as a Means of Measuring Profitability and Changes in Financial Position The role of the balance account in revealing the change in a merchant’s wealth or the profit and loss account in throwing further light on the components of increased wealth is often commented upon. The oldest surviving book on merchants’ accounts published in Britain connects the need to know fi nancial position with the importance of being able to identify changes in fi nancial condition: And alwaies duryng his life tyme, at the least once in the yere, to peruse and cast over his boke to se in what state and condicion that he standeth in, and not to procede confusedly, not knowyng whether he increase or go backward, whereby many persones have deceived themselves: But by this ordre and treatise (whiche mai be called the Marchantes glasse) that inconvenience maie sone be remedied and holpen. (Ympyn Christoffels 1547: Chapter 2)

78

A History of Management Accounting

Stephens (1735: 6) informs readers that ‘Book-keeping is an Art by which the present Condition and extent of a Man’s Estate are discover’d’; Mair (1736: 2) that it enables the merchant to ‘know . . . what Goods he has purchased, what he has disposed of, with the Gain or Loss upon the Sale’; Hayes (1739: 2; see also: Gordon 1765: 15; Mair 1773: 67; North 1714: 87) that ‘Accompts’ are made up ‘to shew at any Time, whether the Owner’s Circumstances are in an ebbing or flowing Way’; Stevenson (1762: 12) to ‘see whether my Circumstances be better or worse, and by how much the Alteration is on either Side’; while for Dodson (1750: i) it was to reveal for merchants ‘what Gain, or Loss, has happened thereon; and whether his Expenses have been less than, or exceeded, his Income’. Monteage (1675: preface) sees DEB as helping the owner understand why his fi nancial position has altered: ‘this Method . . . shews a perfect reason of the Increase and Decrease of ones Estate’. The connection between a merchant’s primary business objective and bookkeeping is addressed by Clark (1738: 1): The Design of every Person in carrying on Trade is without Doubt to improve his Fortune. It is therefore necessary for all Merchants, and others, in order to know whether they Encrease or Lessen their Estates, to keep an exact Account of their Transactions in Trade, as they daily occur, together with all the different Alterations, and the Profits and Losses arising from those Alterations of their Estates. The virtue of the bookkeeping systems they describe is that the accounts show not only overall profit but also the amounts arising from different lines of business. Hatton (1695: 137; see also Chapman 1764: 13; Hawkins 1704: 1; Jackson 1771: 5; Macghie 1718: 1; Thompson 1777: 1–2) believed that ‘The Method of keeping Books by way of Debtor and Creditor or (as some call it) after the Italian manner, Is so regular and precise that at any Time the Merchant can be resolved what he gaineth or loseth by every particular Person he dealeth with, or Merchandize he dealeth in’. Hamilton (1735: 1) refers to the ‘Science’ of DEB making the merchant ‘Sensible’ of ‘what he has gained or lost by every Subject’; Cooke (1764: iii; see also Donn 1775: iv) claims that the books reveal ‘the particulars of the Purchase or Disposal, Gain or Loss, attending each separate species . . . of Goods he has in his Warehouse’; and in Hamilton’s view (1788: 265; see also Stevenson 1762: 13), ‘They should exhibit the state of all the branches of his business; the connection of the different parts; the amount and success of the whole’.

3.3. Merchandise—Designing and Constructing the Accounts Texts demonstrate a clear recognition of the need to weigh up the question of how much detail to provide in order to make the records most informative. As Malcolm (1731: 44) put it,

Merchants’ Accounts 79 And as to the forming of Accounts for them, I must fi rst say in general, that it depends upon the Circumstances of one’s Dealings in these Things, whether it will be most convenient to make the Accounts general or particular, and how many Species to take into one Account; for which he must apply in the most judicious Way he can, this Maxim, viz. That too many particular Accounts, or too general Accounts, are equally opposite to that Clearness and Readiness, with which the State of our Affairs ought to appear in our Books. Naturally, considerable thought was given to the design of merchandise accounts by writers keen to attract a mercantile clientele for their manuals. Ympyn Christoffels’ sixteenth-century text (1547: Chapter 1) advises, And now to speake of a Marchant, to hym perteigneth thre thynges first a sobstancial stocke secondarily, knowledge in castyng and cifryng, and thirdly knowledge of his wares (as well whiche are good as whiche are profitable) and to knowe how to enter every sorte of those wares in his boke, that the one be not a confusion to the other, and countre debtes, losses and gaynes as this treatise more plainly by example shal declare. North (1714: 14; see also: Cooke 1764: iii; Hamilton 1788: 268; Hawkins 1704: 4; Malcolm 1731: 44) acknowledges the fact that some merchants maintain a single merchandise account, ‘but more commonly they entitle the Accompts more particular, as Cloth, Silk, Lead, Cochineal, and the like; whereby the Trade in each Species is ranged together’. Merchandise accounts typically revealed quantities as well as values.13 Stevenson (1762: 12; see also: Chapman 1764: 7; Cooke 1764: v; Gordon 1765: 45; Hamilton 1788: 267; Jackson 1771: 5–6; Macghie 1718: 48–49; Mair 1736: 77; Malcolm 1731: 88) stresses the importance of ‘an inner Column, made for the Quantities’, as a means of enabling the trader to keep track of his property: if ‘upon the Debit Side finding 200 Yards, and upon the Credit only 150 Yards disposed of, I know there must be still 50 Yards remaining in my Custody’. Mair (1736: 77; see also: Chapman 1764: 7; Donn 1775: 32–33) explains the potential that intricate merchandise accounts provide for the identification, on full disposal of goods, of ‘Defect or Excess in Weight or Measure’. In such circumstances ‘the inner Columns will not be equal. In this case the Balance or Equality must be restored, by inserting as much in the deficient Column as will make it Equal to the other, writing the Word Inlack or Outcome before it, as the Reason why it is added; but nothing goes to the Money Columns’. The potential provided by merchandise accounts to enable merchants to manage their affairs from a distance was sometimes also made explicit: ‘A Merchant may, at any Time, know what Goods he has on hand, by comparing the inner Columns of the Accompts of Goods, without being put to the Trouble of inspecting his Ware-house, and weighing or measuring the Goods themselves’ (Mair 1736: 77; see also Chapman 1764: 7).

80 A History of Management Accounting

3.4. Merchandise—Valuing the Balance With a view to improving the economic significance of computed profit or loss on goods sold, writers drew attention to the need to identify and value the closing stock of merchandise. This involved making ‘a double Balance’ (Mair 1736: 77). More specifically, as Hamilton (1788: 268; see also Macghie 1718: 48) put it, ‘If the sum of the inner [quantity] column be greater on the Dr. side, it shows that part of the goods are on hand; and their value must be added to the sum of the Cr. side, before the gain or loss can be determined’. Here the age-old accounting problem of whether to use cost or value to measure assets belonging to an entity is in full evidence. Supporters of what is today referred to as historical cost include: Hawkins (1704: 16; see also Dodson 1750, illustrative ledger of Traffick Sealand, merchant, fos. 6 and 16; Stevenson 1762: 12), who favoured ‘the sum which they cost’; Macghie (1718: 49; see also: Chapman 1764: 7; Donn 1775: 32; Gordon 1765: 52), who believed ‘what goods remains in my Hands yet unsold, [should be] valued at prime Cost’; Mair (1736: 77), who instructed readers to ‘value them at their own Price’; and Hamilton (1735: 13; see also Thompson 1777: 24–25), who favoured valuing ‘what remains with first Cost and Charges’. Malcolm (1731: 89) employs the modern-day prudence concept to justify the measurement of merchandise at cost: ‘Yet it seems more reasonable to value them as they cost you; for otherwise you bring in Gain and Loss to your Accounts, which has not yet actually happened, and may, perhaps, not happen; because you may not dispose of them at those Rates’. Hayes (1739: 79; see also Malcolm 1731: 89) offers the option of valuing ‘those Goods that remain by you unsold, either at the Price they cost you, or at Market Price’. Indeed, Hayes (1739: 79) believed it to be ‘usual with Merchants . . . to value the Goods that they have by them at the Market Price they then go at, at the Time of their balancing; but some do not so’. Hamilton (1788: 285) advocates market price, perhaps a little ambiguously, through his reference to ‘estimated value’, but Dodson (1750: v) is perfectly clear-cut: ‘Hence, altho’ the Goods be not actually sold, yet if their Value or Market-Price be encreased, or diminished; Stock [meaning owner’s capital] is likewise affected thereby’. The concern to ensure that merchants need to be aware of unrealised as well as realised profits is dwelt on more fully by Hamilton (1788: 285): ‘It is much more proper to value the goods on hand in conformity to the current prices, than at prime cost: For the design of affixing any value is to point out the gain or loss; and the gain is in reality obtained so soon as the prices rise, or the loss suffered so soon as they fall’.

3.5. Merchandise—Calculating Profit or Loss The carefully constructed merchandise accounts, containing quantities, values, and measures of profit and loss, were clearly intended to serve more than ‘limited objectives of a technical ‘bookkeeping’ nature’ (Yamey 1949:

Merchants’ Accounts 81 110). The writers’ narratives indicate that the exercise was undertaken to enable the merchant to assess performance, for they describe not only the mechanics of the exercise but also how the results were to be interpreted. As early as the mid-sixteenth century, Ympyn Christoffels (1547: Chapter 1) drew attention to the role of merchandise accounts as a source of enlightenment on ‘whiche are good as whiche are profitable’. For Snell (1718: 3), separate merchandise accounts were necessary ‘if you would [want to] know the Profit or Loss arising from each particular kind’. Hamilton (1788: 268) acknowledged the fact that it might be more convenient to record ‘in the same accompt . . . two or more kinds of the same sort of goods’, but warns that ‘This method exhibits the gain or loss on the whole goods; but does not show how much of it arises from each kind’. North (1714: 14; see also Hamilton 1788: 268) drew attention to the need for greater detail ‘as Business Spreads’; otherwise ‘the Trade of each Species [of goods] is confounded; therefore they choose to make the Species of Goods, as Cloth, Silk, &c. Dr. for what is invested in them; and then the Consequences of that Trade will in time distinctly appear’. Thompson (1777: 6) picks up the same theme when pointing to the need for analysed goods accounts ‘in order to conduct your affairs with judgement and regularity’.

3.6. Accounts, Decision Making and Uncertainty The above discussion contains incontrovertible evidence of writers’ choosing language indicative of a pervading belief that DEB-based accounts contained information which enabled merchants to manage their affairs. In so doing, emphasis was placed on the need to pay close attention to valuation methods so as to achieve a more meaningful profit figure. Almost all treatises that contained significant discussion of the nature and operation of the system of DEB emphasised the role of the ‘ballance account’, as William Hamilton (1735: 1) described it, in informing the merchant of the ‘true State of his Affairs’. Writers such as Robert Hamilton (1788: 268, 285) emphasised the need to use current prices, perhaps as Macghie (1718: 1) put it, so that the merchant knows ‘what he is worth to a Farthing’. Monteage (1675: preface) drew attention to the need for the merchant to use DEB as it ‘shews a perfect reason of the Increase and Decrease of ones Estate’, and this could be specifically achieved, as Mair (1736: 2) pointed out, by the books disclosing ‘what Goods he has purchased, what he has disposed of, with the Gain or Loss upon the Sale’. Given that the treatises were targeted at the merchant class, accounting for merchandise naturally featured prominently. Writers (e.g., Hamilton 1788: 268) were aware of the fact that the bookkeeping exercise could operate with a single merchandise account, but most emphasised the need to maintain separate records for each significant category of goods, with the ledger accounts designed to reveal quantities as well as values. The ‘inner’ columns served to identify errors in weights and measures and to inform the merchant of quantities on hand without the necessity of visiting the warehouse.

82 A History of Management Accounting Considerable disagreement about how the closing stock of merchandise should be valued has been revealed, demonstrating a conviction that the choice was seen as significant in terms of what was reported as profit and for the purpose of ‘Estate-reckoning’ (Dafforne 1635: 46). Hayes (1739) favoured cost for reasons of prudence, whereas Dodson (1750: v) advocated recognition of unrealised profit on the grounds that ‘if their Value or Market-Price be encreased, or diminished; Stock is likewise affected’. The implications for performance assessment and decision making of choosing the wrong valuation method is considered at length by Thompson (1777: 24) who takes Mair to task for using ‘prime cost, exclusive of any other charge either abroad or at home’. Given that ‘the true intent of Double Entry is to shew what every particular article cost us, in order to direct us in the disposal of them, as well as to know exactly what we gain or lose by each’ (Thompson 1777: 24), Thompson (1777: 25; emphasis added) advocates the use of ‘prime costs and charges’—in modern-day nomenclature, total/absorption costing. The failure of Mair to include incidental costs of £75 0s. 11d. causes the merchant to believe ‘that he had gained 49l. 2s. 3d. which is exactly 50 per cent. [on cost] whereas in reality he would have lost 25l. 18s. 8d.’ (Thomson 1777: 25). He continues, ‘this therefore (as I observed before) must greatly mislead the merchant’. Although not explicitly linking the issue with asset valuation, many other writers were clearly fully aware of the importance of knowing the profits or losses arising from the sale of particular types of goods, with Hamilton (1788: 268) and Thompson (1777: 6) making explicit its significance for decision making. Ympyn Christoffels (1547: Chapter 2) emphasised the role of DEB-based accounts in enabling a merchant ‘not to procede confusedly, not knowyng whether he increase or go backward’, and to this can be added the further warning that even successful traders, with ‘Books regularly kept . . . would have been more at Liberty to think, and have better known how to have pushed Things farther’ (London 1752: vi). The concern of North (1714: 14) to ensure that individual merchandise accounts contained information for decision making has been mentioned. Later in the treatise North (1714: 18–19; see also 87) expands on the decision-useful characteristic of DEB: when the Accompt is broken into divers Denominations, as Profit and Loss in general, then Profits of real Estate, Profits of Money at Interest, Profits by Stock-jobbing, Profits by Gaming and the like, as many as any Man’s Circumstances require, either from multiplicity of Dealing, or his own Humour suggesting, in order to satisfie his Curiosity, or guide his judgement by what shall appear upon casting, or upon carrying Totals over to the general Accompts of the Stock. Monteage (1675: preface) colourfully observes that ‘he who daily sees his Accounts fairly and duely kept, knows how to steer the Fly-boat of his Expences, to hoyse or lower his Sails of outgoing, according to Wisdom’. In a similar vein, Colinson (1683: 1) refers to the fact that DEB ‘directs him

Merchants’ Accounts 83 the way to Imploy [his resources] to the best advantage’, while King (1717: preface) likens a man whose ‘Accompts are always in Confusion’ to ‘a Ship in a boisterous Sea without Mast or Rudder, which cannot be expected but to sink or run a-ground’. Stephens (1735: 4) insists, .

it is indispensably required of every prudent Man to know exactly the computed Value and Condition of his Estate, in order to the well governing himself in the Management of his worldly Affairs: for without that Knowledge, he cannot make any one Step in them with Certainty; but must grope blindly in the Dark, and by Chance sink or swim; which is a Hazard no wise Man would willingly trust his Fortune to. Stephens (1735: 4) sees a knowledge of the past as a precondition for understanding the merchant’s ‘Circumstances’; otherwise ‘he cannot make any Judgment of the future from the past, or justly reflect upon his own former Conduct, whether good or bad’. North (1714: 9) sees the ‘ballance’ account as having as its purpose to enable the ‘Master’ to ‘see the Increase or Decrease of his Estate; and in case of the latter, reform his Measures of Living’ and, beyond that, ‘also see thro’ all his Dependencies at once, and be admonished thereby of giving Orders for composing such, as are out of order’ (emphasis added). London (1752: 1) considers DEB to give ‘People . . . a Knowledge of the true State of their Affairs and Circumstances, for the better Regulation of their Conduct, in pursuit of their Interests’. Then there is Wardhaugh Thompson, the one early writer whose comments on the usefulness of accounting for decision making are well documented, and whose conviction of the importance of identifying the ‘particular gain or loss upon each article we deal in’ provided the inspiration for Yamey (2000). Without such knowledge, according to Thompson (1777: 1), a businessman ‘can only be said to deal at random, or at best can be called but guess’d work’. Perhaps many did, but not those who employed DEB to provide the information required to extend or curtail our trade as we fi nd our capital will admit of, or the nature of our affairs require. In short, it [knowledge of DEB] is a qualification so absolutely necessary for every person in trade, that it may be truly said, their success (if not wholly) in a great measure depends upon it. (Thompson 1777: 2; see also 6) The problem of uncertainty in trade, inherent in a number of the above exhortations designed to encourage good accounting, is the explicit subject of the text by Gordon (1765: 1–2) which includes the following comments: Commerce, like the curse of exchange betwixt nations, is by nature variable and fluctuating; the branch which may have afforded considerable

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A History of Management Accounting profit at one time, may scarce be worth embarking in at another, as the markets may be overstocked by a multitude of traders striking into that branch in particular. In this, and indeed in every case, it requires foresight to judge exactly when to launch out, and when to wind up; to the want of proper intelligence and precaution in which we may fairly state one half of the failures among considerable merchants, the decay of our manufactures at home, and impunctuality of our correspondents abroad.

Gordon (1765: 7–8 and 11–12) sees accounting as a source of information which helps to combat some of the many uncertainties arising from engagement in business activity, not only by the use of DEB but also through the preparation of a running annual cash budget. Finally, it is implied by their words that the expectation of treatise writers was that the system of DEB should make information available to the merchant for purposes which include performance assessment and decision making, not just once a year but continuously. Clark (1738: 2) uses the phrase ‘may at any Time’, Dodson (1750, i) ‘at any Time’, Stevenson (1762: 12) ‘with little Trouble and in a very short Time’, Gordon (1765: 15) ‘that it may be known at any period’, and Thompson (1777: 2) ‘in a few hours, and with very little trouble, at any time’. The next sub-section considers whether the occupations followed by the writers of treatises discussed above provide any clue to the likely adoption of their ideas in practice.

3.7. The Authors Thirty-nine of the authors had known occupations:14 15 teachers,15 8 accountants,16 4 accountants who were also teachers,17 8 merchants,18 3 gentlemen (Carpenter, Hatton and Liset) and 1 ‘Person of honour’ (North). For many of these writers, a fi rsthand practical experience of the nature and purpose of the accounting systems they described can be safely assumed. Further, the extent to which members of each occupational group focused on issues of relevance to this study can be examined based on the content of the columns headed 1–6 in Table 4.1. The average score of the 15 teachers is 3.1 hits, the 8 accountants’ average 1.9, the accountants who were also teachers are a little lower at 1.8, the merchants’ arithmetic mean is 3.5 and that of the gentlemen (including North) is 1.5. Books written by one of the accountants, three of the merchants and five of the teachers contained material which has resulted in them having entries in at least five of the six columns. The high average score achieved by merchants in this analysis suggests that the accounting procedures described in this chapter, and the contribution which it was claimed they could make to the more efficient conduct of business affairs, may well have received practical application.

Merchants’ Accounts 85 4. MERCHANT ACCOUNTING PRACTICE In this section the available evidence concerning the use of accounting information for management purposes during the mercantilist period is reviewed. First, the surviving records of merchants are examined. Second, relevant insights provided by the accounting and economic history literature concerning the business practices of a joint-stock merchant trading company, the Hudson’s Bay Company, are presented.

4.1. Merchants Minchinton (1969: 3) points to the ‘scarcity of [surviving] commercial papers’ for merchant houses. That merchants maintained detailed records of their affairs is certain19 but, for a major commercial centre such as Bristol, ‘only a few fragments have escaped the bonfi re or the scrapheap’ (McGrath 1970: 2). The position appears to be little different elsewhere (Grassby 1969: 732; Vanes 1967: 357). The contents of surviving accounts that have been the subject of study are outlined below. We will start with a study of non–double entry records in order to provide readers with an understanding of the potential role of this type of accounting system in running a business. The Cely shipping accounts, which Hooper (1995: 112) describes as ‘single entry records’, contain some early insights into the use made of accounting by early overseas merchants. The rise of the English merchant marine trade in the second half of the fi fteenth century has been attributed to the need to fi nd new ways of making money at a time of diminishing domestic trade. In particular, the gradual decline of the wool trade encouraged diversification in the direction of cloth and wine (Hooper 1995: 87). The Cely family were London wool and wheat merchants who ventured into ship ownership in 1486 when the fi rst of a series of voyages to Bordeaux began. The fi nancial accounts for a voyage, which saw the Margaret Cely return to London in March 1487, are complete. A major purpose of these accounts was to fulfi l a principal/agent role by providing a check on the agent John Speryng and the purser William Aldereche. The traditional job of the purser was ‘to sell and buy on the fi rm’s behalf and to provide for the crew’ (Hooper 1995: 87), but it seems that these functions where shared between Speryng and Aldereche on this occasion. One of the partners in the voyage, George Cely, kept detailed records showing the costs involved in importing wine from Bordeaux, and this information, together with details of sales revenue, enabled the ‘margin of profit to be calculated’ (Hooper 1995: 97; see also 112). 20 In Hooper’s estimation, the 30% margin compared with 10% on domestic trade ‘provided a rational basis for such [diversification] decision making’. The Cely accounts also reveal great care being taken to ensure the fair allocation of receipts and costs between the three partners.

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Other evidence of merchant accounting is based on surviving ledgers kept on the double entry basis. That of the prosperous London cloth merchant engaged in the Anglo–Spanish trade, Thomas Howell, covers a period (1517–28) when he was based in Seville (Johnson 1915: 44). The ledger reveals that this Tudor merchant engaged in processing as well as trading activities: ‘Howell handled cloths at different stages of production. There are many references showing that he purchased unfinished cloths and had them barbed, folded, pressed, sheared and dyed in England’ (Connell-Smith 1951: 365). Howell’s ledger is in the possession of the Worshipful Company of Drapers of London who claim it to be ‘the earliest known English example of the system of Double Entry Accounts’ (Connell-Smith 1951: 363). It contains personal and merchandise ledger accounts kept in accordance with the principles of double entry, and also lists transactions which, by their appearance and lack of folio cross referencing are unconnected with other entries in the ledger. There is no evidence that it was intended to provide a comprehensive statement of Howell’s affairs. There is no capital account and the ledger is not designed to provide periodic calculations of profit or loss. Connell-Smith commented that, even where profit figures could be found, it proved ‘difficult to reconcile the profits [Howell] enters with his own figures’ (Connell-Smith 1951: 369). These comments are not intended to dismiss the Howell ledger as supplying a record of only rights and obligations. Indeed, it is impossible, today, to assess its potential for managerial purposes to a proprietor with intimate knowledge of the significance of the detailed explanations accompanying many of the financial values recorded in the ledger. Nevertheless, its utility as a basis for performance assessment and resource allocation decision making appears limited to the modern reader. The surviving sixteenth-century account books of John Isham (Ramsay 1962) and John Smythe (Vanes 1974) are readily available to researchers through the assiduous transcription of their contents. John Isham was a Northampton-born London merchant. Unlike many successful merchants he did not rise from humble beginnings, being one of five sons of a family situated among the ‘minor gentry’ (Ramsay 1962: xi). Following tradition, the eldest went into the law, the second took holy orders. The other three sons, including John, were apprenticed to merchants in the City of London. Family money did not fi nd its way to John to any significant extent, if at all, and Ramsey concludes that his initial capital was obtained through marriage to the well-to-do widow Elizabeth Barker (Ramsay 1962: xxxvi). Just two ledgers have survived from the full range of account books maintained in Isham’s counting-house, and these cover the period 1558–72 (Ramsay 1962: c). The fi rst is partly written up using double entry techniques, but Isham’s enthusiasm for keeping his ledgers in a systematic manner appears to have waned (Ramsay 1962: cvii). Their place within the overall accounting framework is unclear and how the other books were maintained is unknown. Those that survived are of interest because of the periodic inventories made to establish Isham’s

Merchants’ Accounts 87 fi nancial position. Other entries focus on his fi nancial relationships, principally undischarged debts (Ramsay 1962: c). John Smythe is part of the not uncommon story of families rising from obscurity to great wealth and, in the process, transforming themselves from work-driven merchants to leisured landowners. The tale begins in the late fifteenth century when two brothers, Matthew and Thomas Smythe, moved from the Forest of Dean to Bristol to seek their fortunes. It was Matthew’s son John, again aided financially by marriage to a rich widow (Bettey 1978: 4), whose outstanding success as a merchant created enough wealth to enable him ‘to purchase lands in several places around Bristol, including the house and estate at Ashton Court’ (Bettey 1978: 3). 21 Smythe is therefore a typical example of ‘the great merchant who, having made his fortune, sought to expunge the taint of trade by the correctness of his life as a country gentleman’ (Sutherland 1962: 5). A further signal of Smythe’s aspirations for upward social mobility is the decision to send his sons to be educated at Oxford and, from there, to London’s Inns of Court. Smythe traded with France and Spain in a wide range of products, including the export of woollen cloth, leather, lead and wheat, and the import of Bordeaux wine, iron, woad and other dyestuffs (Bettey 1978: 5; Vanes 1974: 4–10). The single surviving ledger covers the years 1538–50. It contains no inventory of Smythe’s goods but, as Vanes points out, this does not prove that none was made. Where you have less than a complete archive available, and this is almost always the case, you can only make the best of what it contains. Smythe’s ledger is in bilateral format with transfers made between many of the accounts that it contains. Whether he kept a full system of double entry is unclear (the existence and content of other books are unknown) and, probably, unimportant for our purposes. The ledger reveals separate voyage accounts for each large consignment sent abroad, and this enabled Smythe to determine and ‘compare, year by year, the relative profitability of the various overseas markets to which he sent his goods’ (Vanes 1974: 18). Individual accounts maintained for imported merchandise enabled him to assess ‘the profit received on iron, the various kinds of wine, fruit, woad and oil’ (Vanes 1974: 18). It is not clear whether the closing inventories were valued at cost 22 or selling price (Vanes 1974: 20, 21), but the assembly in a single ledger account of the balances on these voyage and merchandise accounts enabled Smythe to calculate overall profit or loss (see ledger fos. 92, 100 reproduced in Vanes 1974: 132, 237). Although, as was often the case (Yamey 1959; Yamey, Edey and Thomson 1963: 180–201), the profit and loss account was not periodically balanced, ‘Lines drawn under three of the totals on the [fi rst] profit and loss account [round about the end of each calendar year], show that Smythe could at any time roughly calculate his profit over a given period, without actually closing the account in the ledger’ (Vanes 1974: 21). Moving on to the seventeenth century, the ledger of Daniel Harvey & Company covering the period 1623–46 is another example of a lone

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surviving account book. It is, in the estimation of Yamey (2010: 164), ‘one of the earliest known account books relating to an English mercantile business that was clearly kept on the double-entry basis’. The ledger shows that the Harveys traded with Constantinople, Aleppo, Naples, Leghorn and Rouen and, as with Smythe, contains separate accounts that enabled profit or loss to be calculated on merchandise traded and voyages undertaken. To help ensure the accuracy of the records, and to guard against loss and theft, some of the merchandise accounts incorporated the quantity columns that featured in the bookkeeping treatises which, as noted above, appeared in growing numbers as the seventeenth century progressed. The accounts also record closing valuations of merchandise but do not show how the figures were computed. The account book of the London merchant, George Warner, reveals that he traded with northern cities of continental Europe such as Hamburg, Amsterdam and Rotterdam. Covering the years 1638–43, it reveals full cross referencing between accounts within the ledger, but cross-references are made neither to a journal nor to any other subsidiary book of accounts. Also, there is no balance account, but this may of course have been kept in a separate book to maintain confidentiality. Focusing on the year 1638, the ‘Accompt of cloth bought’ (dr) ‘and shipped’ (cr) (The National Archives (hereafter TNA): SP 46/85/3: fo. 20) reveals that virtually all purchases were transferred to the ‘Voyadge off Hamburg’ account (TNA: SP 46/85/3: fo. 11) through seven entries made between April and November 1638. Unsold cloth at the end of the calendar year was valued and the amount ‘gained’ of £500 2s. 0d. transferred to the profit and loss account (TNA: SP 46/85/3: fo. 25). One might surmise that the transfer prices used were estimates of the amounts which could have been obtained from the sale of cloth on the home market. Certainly the transfer prices were above cost. Warner’s factor in Hamburg, Pearce Starkey, took delivery of the cloth consigned to him during the summer and autumn of 1638, and we can deduce from the structure and content of the accounting records that sales continued through to the late spring of 1639. Two amounts were credited to the voyage account on 1 May 1639: £10,808 2s. 0d. due from Pearce Starkey for cloth sold; and a valuation of £4,970 placed on goods remaining ‘in hand’ which was carried forward to the voyage account for the next accounting period. The outcome was a ‘profit & loss gained’ of £1,954 13s. 0d. (TNA: SP 46/85/3: fo. 11). The closing accounting date used for the voyage account in each of the remaining four years covered by Warner’s ledger was Lady-Day (25 March). Overall, therefore, there is no consistency in the accounting dates used within the ledger, but measurement decisions are clearly reflected in the content of the accounts. Neither are the entries in the profit and loss account totalled on an annual basis, but all the details of profits and losses, together with other revenues and expenses, are summarised there in a convenient form for perusal and further analysis.

Merchants’ Accounts 89 Grassby (1995: 187) describes Warner’s ledger as ‘a bastard form of double entry’. Certainly it was not the interlocking system of DEB articulated in contemporary texts on merchants’ accounts. But the fact it did not comply with the pattern espoused in didactic texts is both interesting and significant. Given the failure to comply with textbook formats, which we should acknowledge remained thin on the ground in 1638, one might conjecture a utilitarian inspired accounting framework. Assuming this to have been the case, a clear priority was an accounting record that disclosed the value of unsold merchandise together with measures of amounts owing and owed. But Warner’s account book extended beyond tracking such rights and obligations to provide him with a running record of profits that differentiated between the component elements of business activities undertaken by an international trader. The extensive surveys of seventeenth-century merchants’ accounts carried out by Grassby (1969, 1995) reveal ample interest in profit calculation. Some of the ledgers studied also contain inventories of the owner’s possessions, such as that recording the affairs of the London merchant Henry Hunter, but ‘between 1679 and 1698 he relied entirely on his Profit and Loss account’ (Grassby 1969: 722). 23 Although trading accounts were usually closed to the profit and loss account, the overall surplus was not always carried through to the capital account. Sometimes Grassby’s efforts to calculate the ‘rate of profit in seventeenth century England’ were frustrated by the fact that trading accounts were not closed at all, or only when the page was full (Grassby 1969: 723; see also Yamey, Edey and Thomson 1963: 186–193). In assessing overall returns for businessmen, 24 the position is further clouded by the well-known failure to distinguish commercial from other investments and private from business expenditure and, even where inventories of fi xed assets were made, the failure to charge depreciation. What can be made of these accounting systems? Grassby (1969: 749) complains that, although merchants were employing DEB, it was often not a complete system: ‘Genuine double-entry book-keeping was extremely rare in practice, balancing was highly irregular’. What counts as ‘genuine’, however, is not straightforward. Winjum (1971: 335) helpfully distinguishes between four versions of DEB:25 1. A bookkeeping system constantly in equilibrium in which the only criterion is the equality of debits and credits 2. Version 1 with the addition of a capital account 3. The use of nominal accounts (revenues, expenses, ventures, etc.) in addition to the capital account of System 2, but an irregular closing of these accounts to capital. Under this system, there is no periodic calculation of net income 4. System 3 except that there is a periodic closing of nominal accounts to capital and the annual calculation of net income

90 A History of Management Accounting It is the third system that is often found in the ledgers that have survived the ravages of time. It is presumably the absence of regular balancing and the systematic closure of the profit and loss account to the capital account that causes Yamey (2010: 166) to categorise the sixteenth-century ledgers of John Isham and John Smythe as ‘not in double entry’. More generally Grassby (1995: 186) complains that ‘the accounting periods in many books were not clearly defi ned and the posting was sloppy, retrospective and uneven’. These assessments are more critical than our own, based on the evidence presented above. While systems often failed to achieve the technical clarity of Version 4 above, they exhibited the fundamentals of DEB and, given the success of their owners, it might be imagined that they proved fit for purpose. Undoubtedly these ledgers and many others were incomplete in both a real and technical sense but, more important, was what they told merchants about their often far-flung trading operations. In terms of their potential contribution to performance assessment, they are sometimes judged to be defective by present day standards (Grassby 1969; 1995: 184–189). But most merchants were trained in accounting and the books were kept either by themselves or by someone under their close supervision (Yamey, Edey and Thomson 1963: 186–187; Grassby 1995: 185). We can therefore be sure they would have been able to exploit, to maximum effect, the fi nancial knowledge conveyed in the pages of the ledger. Overall, we can conclude that at least some international merchants made material use of double entry procedures and that their ledgers contained detailed calculations of profit and, sometimes, measures of capital invested. The following assessment seems about right (Winjum 1971: 350): Although the ability of double entry to reveal the success or failure of a business enterprise for a specific period of time was not valued by the early English merchants, double entry’s capacity to accumulate data on individual operating activities, combined with its ability to bring order to the affairs and accounts of these merchants, stimulated and rationalized the economic activities of the early English merchant. The technical adequacy, or otherwise, of DEB is not of course considered by everyone to be a matter of principal concern. Carruthers and Espeland (1991) argue the need to recognise the rhetorical or symbolic role of DEB as well as the technical. They see the character of DEB, through ‘the balanced nature of the transactions of a fi rm’, as helping, early on to prove ‘the legitimacy and justness of the business’ (Carruthers and Espeland 1991: 39). Indeed, they take to task advocates of scientific capitalism by challenging their preoccupation with its technical role: ‘If the issue for businessmen using double-entry accounts had been rationality, then why would their practice of keeping books have been so sloppy?’ (Carruthers and Espeland 1991: 62). Quite apart from the question of whether the depiction ‘so sloppy’ smacks of teleology, what Carruthers and Espeland do not explain

Merchants’ Accounts 91 is how DEB’s symbolic role might achieve effective impression management in the absence of apparent fitness for purpose. The next section focuses on the accounting practices of a merchanting operation which has been the subject of significant study by accounting historians. The Hudson’s Bay Company is also distinctive in that it traded as a chartered joint stock enterprise.

4.2. Management of an Early Multinational Assisted ‘by the Numbers’26 It has been said that ‘England emerged as an important trading nation in the reign of Charles II, 1660 to 1688’ (Carlos and Nicholas 1990: 853). The contribution to overseas trade of the great chartered companies is expressed by the business historian, Charles Wilson (quoted in Carlos and Nicholas 1990: 854), in the following unambiguous manner: ‘Without the resources which only the joint stock Company could mobilise, the expansion of trade in far-distant and turbulent lands would, at this stage, have been impossible’. Ten years after the Restoration of the monarchy the Hudson’s Bay Company (HBC) was created by Royal Charter (1670). Today, it is the world’s oldest commercial organization which continues in its original line of business. Its charter bestowed a monopoly over trade and commerce carried on in the lands whose rivers and streams drained into the Hudson Bay of today’s Canada. According to Carlos and Nicholas (1988: 399): The early trading companies were characterized by a large volume of transactions, and they innovated in mechanisms of administrative control to increase their information and to reduce the costs of transacting internationally. In these two critical respects, the early trading companies were indeed analogues to the modern multinational. 27 HBC, created as a limited liability joint-stock company (Carlos and Nicholas 1993: 244), comprised three quite distinct organizational levels: • Top management, consisting of the London governor and committee • Middle management, made up of the ‘officers’ who managed the trade in north America • The ‘servants’ (canoemen, carpenters, labourers and cooks) who worked at the posts established in the Hudson Bay HBC, in common with other seventeenth-century trading companies surveyed by Carlos and Nicholas (1988), 28 therefore faced the problem of control in circumstances where the decision-makers in London were distant from the operating activities, and this situation was ‘exacerbated by the reliance on the once-yearly arrival of ships to the Bay to replenish stores, load furs, and deliver mail and instructions’ (Carlos and Nicholas

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1993: 244). At HBC, the challenge to maintain control over managers based abroad was tackled in three ways. First, they were well remunerated through contracted wages and large gratuities which increased the opportunity cost of losing their position with the company. The formal contractual arrangement also provided for managers to take oaths of honesty and to post large bonds (Carlos and Nicholas 1990: 863–866). Second, the company developed a social structure designed to help underpin a corporate culture of loyalty. A key feature was the development of a family relationship by hiring lower-level workers almost exclusively from the Orkney Islands and apprenticing boys from Christ’s College in London to become the future managerial class (Carlos and Nicholas 1990: 872–874). The latter, described as ‘Blue Coat Boys’, were educated in writing and arithmetic: ‘they all write fair hands and cast accounts’. 29 Third, the activities of managers and other employees were closely monitored. This was done both directly and indirectly. Direct monitoring took the form of physically searching incoming and outgoing ships and the men’s baggage for illicit goods (Carlos and Nicholas 1990: 865). It was also the practice to read their mail for evidence of private trade. Activity was also monitored indirectly ‘by putting into place a set of internal control mechanisms designed to account for all trade goods sent to Hudson Bay’ (Carlos and Nicholas 1990: 875). Carlos and Nicholas continue, To this end the managers were required to follow rigorous standards in the maintenance of post records and in particular of all account books. Through these records the company could monitor the trading activity of individual managers, and . . . devise indices based on the accounts to be used as monitoring devices. Carlos and Nicholas (1990: 875) point out that, for the purpose of ‘managing the manager’, ‘success depended on the application of a judicious mixture’ of these policies, and it is the accounting input using DEB with which we are of course concerned. To consider this in more detail, it is necessary to turn to the work of Spraakman and Wilkie. 30 A study by Spraakman and Wilkie (2000: 59) ‘Based on the Company’s archives for 1670 to 1820’ led them to conclude that ‘it is clear that the basic components of the management accounting techniques were in place from the Company’s beginnings or by 1700’. They reveal the existence of an intricate system of budgeting based on ‘outfits and indents’ but, of more precise relevance here, is their description of calculations undertaken from at least 1692 within the discipline of DEB that enabled the measurement of profits and losses for individual posts. The operation of the system between 1692 and 1774 involved the maintenance of ‘ledger accounts in terms of a prime beaver pelt called a “made beaver”’ (Spraakman 1999: 49). Central to this system of DEB was a ledger account referred to as a ‘balance sheet’ whose contents are described as follows:

Merchants’ Accounts 93 In addition to ledger accounts and other documents for tracking the flow of trading goods and supplies, there was a made-beaver-denominated ‘balance sheet,’ which in effect was also a profit statement . . . On one of the two sides of the balance sheet, there were beginning inventories of trade goods and supplies, trade goods and supplies received, cost of employees, and profit if one existed. On the other side, there were the ending inventories, values of sales and the loss if one existed. (Spraakman 1999: 49) The sales figure was based on an accounting construction, the ‘standard of trade’, which was applied to measure the profitability of each post based on the difference between that figure and the amount paid to the aboriginal trappers for beavers’ furs plus the post’s wage bill. The following further comments are made concerning the significance of such calculations: Specifically, [the ledger account] was used to close the district books at the end of the outfit year. It was, in effect, a means of elucidating a district’s efficiency, and in being a culmination of the year’s activities for the district and its posts, it represented an operating statement.31 This was possible with the use of recent fur prices provided by the committee for estimating district revenues (HBCA, reel 508). Unprofitable districts were examined for causes; subsequently, the persons in charge were replaced or other changes were made such as amalgamation of posts or districts to achieve acceptable profitability. (Spraakman and Wilkie 2000: 73, see also 74) Carlos and Nicholas (1993: 246) make similar points: Information from the accounts gave the Company absolute and relative performance measures of its Bay managers, which could then be used to measure effort. . . . The net return (the difference between the overplus and the expenses of the post) were used to discipline (demote, relieve, and recall to London) and reward (through salary increases, gratuities and commendations) its managers. As indicated at the start of this sub-section, management did not attempt to monitor and control its overseas operations only ‘by the numbers’. These were recognised to supply an incomplete measure of performance, because of both opportunistic behaviour on the part of post managers—which contractual arrangements and the company’s social structure were designed to counter— and the effect of local conditions on their ability to perform. Regarding the latter, Carlos and Nicholas (1990: 857) point out, ‘The severity of the winter, disease, or the activity of Indians or competitors had an impact on the level of trading activity.’ Despite these limitations, however, as Carlos and Nicolas (1988, 1990, 1993) argue and Spraakman (1999) and Spraakman and Wilkie (2000) demonstrate, accounting systems (including DEB) were developed and were used to contribute to the endeavour to monitor and control the far-flung activities of one of the great chartered companies.

94 A History of Management Accounting 5. CONCLUDING REMARKS This chapter has surveyed the role of DEB, actual and potential, in accounting for mercantile affairs. The fundamental connection between DEB and mercantile activities is demonstrated by the fact that the terms ‘merchants accounts’ and ‘merchants accompts’ were widely used during the seventeenth and eighteenth centuries to signify what is today described as DEB (Edwards 2011a). As discussed below, it has proved possible to carry out a fairly thorough examination of the managerial potential of DEB as elucidated in published accounting treatises. The study of accounting practice has proved more problematic. The number of merchants account books studied, and it seems available for study, is severely limited (Minchinton 1969: 3), and the extent of their management role is often difficult to gauge. Ledgers were undoubtedly used to track rights and obligations, but the extent to which they were used for that reason and for purposes of performance assessment and decision making are unlikely to be revealed, explicitly, within that accounting record. Indeed, business records more generally often remain tantalisingly silent on the question of accounting’s usefulness to the merchant. By no means all the material that has survived has been subjected to an accounting-oriented scrutiny of course, and an appropriate subject for research is the further examination of merchant’s records that today remain available for study (see also Bryer 2000b). Fortunately, it is possible to refer to published treatises for further insight into the role of accounting for managerial purposes. This is so for the merchants of the early modern period, as it is for farmers and landowners (Chapter 3) and industrialists both then (Chapter 5) and later (Chapters 6, 7 and 9). As Winjum (1972: 13; emphasis added; see also 51) puts it, ‘We can extrapolate motives, goals, and consequences from the extant records, an exercise that involves some speculation and a considerable reading between the lines; but the treatises speak for themselves’. Revisiting the evidence underpinning the debate over whether DEB was inextricably connected with the development of capitalism in England and, indeed, Europe illustrates the need for accounting history research to question the conventional (accepted) wisdom. There is no doubt that, within the treatises examined above, much of the focus was on DEB serving ‘narrow bookkeeping purposes’ (Yamey 1949: 113), but this chapter shows that treatises published from the mid-sixteenth century onwards contain incontrovertible written evidence explicitly testifying to the potential usefulness of DEB for purposes of performance assessment and decision making. Several roles for accounting are identified—accounts as a means of establishing fi nancial position; accounts as a means of measuring profitability and changes in financial position; the construction, content and role of merchandise accounts; and the use of accounts for performance assessment and decision making. It is known that the relationship between the accounting literature and accounting practice is problematic (Fleischman and Tyson 2004). Even where the literature portrays accounting practice, it is likely to do so only for some

Merchants’ Accounts 95 contemporary businesses. Many entities might require less accounting information for management purposes, some might require more, and the variation in accounting complexity will be contingent upon a variety of variables among which the size and intricacy of the business organization are likely to be important. Nevertheless, there are factors which produce a degree of confidence that accounting treatises might be a useful surrogate in seeking to improve our understanding of accounting practice (Yamey 1956: 7). First, there is consistency over a long time period in claims made concerning how accounting might better inform the owner/manager about how a business is performing and how it might help to improve his ‘estate’. Second, the writers on accounting, perhaps much more than became the case later on, were often closely associated with accounting practice (Yamey 1956: 6–7; Yamey 1975: xxiii; Edwards 2011a). While some may have worked as teachers for their entire career, probably the vast majority did not. Many were merchants or accountants at the time they wrote. Those who were teachers at the time of writing their treatise were often also involved in business at some time in their career. Third, some writers claimed to be describing systems which they had installed or worked with. Yamey (1940: 336) persuasively sums up the situation: Considering, however, the striking unanimity revealed by the textbooks, the fact that not a few writers were business men and that in some cases the examples illustrating the text were taken from practice it may be confidently assumed that if there was any divergence between teaching and practice, it lay more in the form than the substance. A compelling reason for adopting DEB, according to many authors, was to enable businessmen to better manage their fi nancial affairs. It is certainly easy to believe that there also existed less altruistic reasons for their literary endeavours, including the desire to make money. It has also been argued in Chapter 3 that the management potential of CDA has been underrated both by the early devotees of DEB and later researchers into accounting’s history. Nevertheless, it is certainly the case that DEB became much more widely used in Britain during the seventeenth and eighteenth centuries. It is widely believed that DEB was developed by the merchants and bankers of Florence, Genoa and Venice during the late Middle Ages and it became the system of choice for the English merchants that helped bring about the economic transformation of England from about 1500 onwards. The last word on the broader influence of accounting on economic growth and Western capitalism is to come. It is not contended that accounting was a pre-condition for Britain’s pre-industrial economic development (an argument consistent with the views of writers such as Sombart and Weber), but we do conclude that many writers claiming the use of (and some merchant businesses using) DEB for performance assessment and decision making purposes during the mercantilist period is supportive of Sombart and Weber’s thesis about accounting having multiple functions.

96 A History of Management Accounting Appendix 4.1 From the Illustrative Ledger of a Fictional London Merchant, King (1717) Stock 1715 Oct.24 1716 Oct.25

Debtor

To sundry Accounts, as per Inventory 38

To Ballance resteth Stock

Note, That this Ballance resteth Stock and is what you are really worth, when your Debts are paid

£

s

d

310

12

6

10337 10647

6 18

0¾ 6¾

10337

6

0¾

£

s

d

Per Contra 1715 Oct.24 1716 Oct.25

Creditor

£

s

d

4748

13

00

899 5000 10647

5 00 18

6¾ 00 6¾

£

s

14 d

15 19 20 28

15 5000 9 27

00 00 14 10

00 00 8¼ 00

15 9

15 5

00 10

00 3½

3 4 5 6 10 16 22 29

86 100 324 23 14 28 10 283 155 377 6477

6 00 14 18 10 11 16 10 00 10 11

00 00 7½ 00 00 1 00 00 00 6 2¼

£

s

d

6 19 3 00 00 00 9

0¾ 8½ 4 00 00 00 1¼

To sundry Accounts, as per Inventory By Profit and Loss, gained by one Year’s Trade By my Father’s Will, left me

14 14

14 Profit and Loss No. 9

1715 Oct.27

32 40 49

Nov.15 Nov.23 1716 Feb.27

51

Mar.26

52

Apr.27 Oct.25

Per Contra No. 10

1715 Oct.27

To C.S. Esq; for Interest of 1000l. due the 27th April next To Mr B.D. To B.A. by Composition

9 7 11

27 6 15

To Voyage to Gibralter consigned to P.Q. To P.Q. my Accompt current for Defect in Goods

5

137

12

6

Nov.8 Nov.14 1716 Apr.27

12

2

10

00

Oct.25

To C.S. Esq; for Interest of 1000l. due the 27th October next To Insurance Account, lost thereby To Charges on Merchandize To Household Expenses To Stock Gained by one Year’s Trade To my Father’s Will left me

9 31 33 37 1 1

27 330 9 22 899 5000 6477

10 00 00 5 5 00 11

00 00 6 00 6¼ 00 2¼

Ballance 1716 Oct.25

Debtor

Debtor

To Cash resteth this day To Yorkshire Cloth unsold To Spanish Cloth unsold To Voyage to Gibralter for Wares unsold To Mr G.C. due to me To Exeter Wares unsold To P.Q. Gibralter due to me To T.G. for Principal and Interest To Grocery Wares unsold To Sagathee To Fine Holland unsold To Mr D. due to me To Hops unsold To Voyage to Galicia for Wares unsold To T.K. at Galicia due to me

Source: King (1717: ledger entries 1, 14, 38).

£ 2 3 4 5 8 10 12 15 16 23 24 25 29 32 36

6658 1590 1087 77 20 215 499 515 464 120 577 125 76 18 385 12429

10 17 00

00 8 00

s

d

11 00 10 10 00 00 12 00 00 00 10 00 4 10 00 9

10 00 00 00 00 00 6 00 00 00 00 00 9¼ 00 00 1¼

By T.O. for Interest of 500l. due 27th of April next By my Father’s Will By Composition with Mr. B. By Mr. G. By T.O. for Interest of 500l. due 27th of October next By C.S. Esq; for Interest 150l. due 27th inst By Yorkshire Cloth gained thereby By Spanish Cloth gained thereby By Voyage to Gibralter gained thereby By Norwich Wares gained thereby By Exeter Wares gained thereby By Grocery Wares gained thereby By Druggets gained thereby By Hops gained thereby By the Flying Eagle gained thereby By Voyage to Galicia gained thereby

Per Contra 1716 Oct.25

Creditor

By Stock By C.S. Esq; due to him By N.S. due to him By Mr E. due to him By Mr G. due to him By Mr K. due to him

30 32

Creditor 1 9 18 26 28 34

10337 871 105 315 300 500 12429

5

Pre-Industrial Revolution Cost Calculation and Management Accounting

1. INTRODUCTION The dating of developments in how accounting was practiced is problematic. It is possible to discover whether defi ned practices were employed at a specific place at a particular time, but whether that was the fi rst time they were used there, or anywhere, remains unknown. Even more important, it is often impossible to discover how widely these ‘new’ procedures were employed. In these areas the accounting historian faces problems which are in some respects even greater than those faced by the economic historian. For example, in helping to improve textile manufacture, it is known that James Hargreaves invented the spinning jenny in 1764, that Richard Arkwright is acknowledged as inventing the fi rst automated process for spinning cotton yarn, and that Edmund Cartwright created the power loom patented in 1785. In cost calculation, we might know that businessmen demonstrated an understanding of the difference between fi xed and variable costs when making decisions at the Melincryddan works in Wales in about 1740. But, quite apart from the difficulty of knowing whether this was a common or uncommon accounting calculation at the time, we are often equally uninformed of its role in enabling businessmen to make better decisions. Some authors are quite defi nite in dating accounting change. The leading early accounting historian A.C. Littleton (1933: 360), for example, believed that the British Industrial Revolution produced a discontinuity in cost calculation practice: ‘Cost accounting, therefore, in the last analysis, represents the influence of the industrial revolution upon double-entry bookkeeping; it is an important element in marking the expansion of bookkeeping (a record) into accounting (a managerial instrument of precision)’. Accounting historians such as ourselves are more inclined towards the gradualist school of thought1 when characterising accounting change. In so doing, we concur with Garner who saw important developments in cost calculation gaining momentum before the industrial revolution. More specifically, Garner (1954: 3) argued that an important impetus for the development of cost calculation was the replacement of the domestic system by capitalist processes

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of production. In his view the British Industrial Revolution accelerated the rate of change but was not the dominant stimulus for change.2 We acknowledge the importance of changes in the organization of industrial activity during the industrial revolution, and afterwards, as stimuli for accounting change (see Chapter 6). However, we see such developments as having commenced before the onset of the so-called British Industrial Revolution. Chapters 3 and 4 have revealed significant innovation in cost calculation practices in a variety of agricultural and commercial settings over a long period of time prior to the late eighteenth century. The initial principal vehicle for industrial developments was the domestic system where, of course, industrial activity was conducted on the basis of a fairly simple series of market transactions. The businessmen purchased materials which were then ‘put out’ to a variety of artisans, each to perform a particular processing function paid for on the piece rate basis. The product, when fi nished, was sold. At each stage of manufacture, the businessman needed very little by way of accounting information to decide which course of action was preferable—for example, further processing or sale—as most of the data were provided by readily available market prices. The domestic system did not, therefore, stimulate the kind of accounting change principally focused on in this book. But other aspects of proto-industrialisation in the seventeenth and eighteenth centuries appear to have done so, especially in expanding sectors such as mining, textiles and iron manufacture. As will be shown in this chapter, additional accounting problems were encountered by businesses operating in these sectors as increasing amounts of capital had to be invested in mines, ore processing equipment, and manufacturing plant such as textile mills, blast furnaces and rolling and slitting mills. In such businesses, the internalisation of activities (both employees and manufacturing processes) gave rise to the need to develop cost and profit fi nding techniques as the basis for both performance assessment and resource allocation decisions.3 Much of the above sees accounting responding to changing circumstances, but it is important to remain cognizant of the fact that the flow of influence need not be unidirectional. As Napier (2006: 456) puts it, ‘one of the major recognitions of recent years within the accounting research community is that accounting is not just reflective but constitutive: it is not merely a passive effect of its environment but works to shape this environment’. The remainder of this chapter therefore surveys what we know about the visibility, application and consequences of cost calculations within industrial settings up to 1760. First, the sources of accounting information available to management are examined. Second, the industrial context within which accounting information became visible is explained. Next, the types of accounting information made available to management are surveyed and the purposes such data were intended to serve are explored. The relationship between theory and practice is then briefly examined before we present our concluding remarks.

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2. TYPES OF MANAGEMENT ACCOUNTING INFORMATION The accounting information prepared for management may be seen to arise from two principal sources—that is, from inside or outside a formal system of bookkeeping—and to take two main forms: routine reports prepared periodically (usually based on a system of CDA or DEB) and ad hoc accounting calculations devised for a specific purpose which may or may not draw on the content of an established ‘accounting system’ (Burley 1958; McKendrick 1970; Pollard 1965: Chapter 6). The above schemata raise the following important initial question: What is a formal system of bookkeeping? Our answer is that any system maintained for the purpose of keeping a continuous record of rights and obligations fulfils that criterion. It would therefore include CDA, other systems of single entry bookkeeping (which might involve the use of memorandum books of entry and ledger accounts to record some of the entity’s transactions) and a fully fledged system of DEB.4 Informal sources of information include the notebook kept by Daniel Hechstetter at the Keswick mining and smelting works in Cumberland between 1598 and 1615 (Hammersley 1988). Indeed, relevant cost calculations might be made on the proverbial ‘back of an envelope’. Industrial cost calculations made as a matter of systematic routine will more likely be the product of a formal system of bookkeeping. The system of bookkeeping on estates was traditionally CDA, and we have seen (Chapter 3) that this had the potential to provide information for managerial purposes. But whether CDA fulfi lled this potential depended on how the system was designed and operated. Certainly, Oldroyd (2007: 20) believes that ‘charge and discharge proved inadequate in itself for dealing with the complexities of coalmining, and a range of other types of report evolved’ containing data on costs, output and sales. For example, in the sixteenth century, the Willoughbys of Wollaton maintained, in addition to CDA, ‘coalpit’ books which fulfi lled these purposes and ‘sinking’ books which detailed the costs of opening up new pits. Similar arrangements were found in place on north-east of England estates in the eighteenth century (Oldroyd 2007: 21). Where a formal system of bookkeeping was in operation within industrial concerns, namely one which provided a continuous record of transactions and the basis for extracting periodic reports, it was increasingly maintained on the double entry basis. We will see that such systems sometimes contained information relevant to performance assessment and decision making, with ‘integrated’ systems of cost and fi nancial accounting recognisable within some iron making companies in the second half of the seventeenth century (Edwards and Boyns 1992; King 2010). In these fi rms, as in others at a time when the range of users, scale of business activity and complexity of fi nancial arrangements were rather more limited than subsequently became the case, it was of course possible for managers to obtain

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the fi nancial knowledge required for decision making purposes from direct examination of the contents of the ledger. An ad hoc cost calculation may take the form of an ex ante estimate made as the basis for deciding whether to invest in a particular activity or to serve as a standard against which actual performance can subsequently be measured. Cost calculations may also be made ex post to assess the profitability of products and to help monitor the performance of individual workers. Such calculations may be made on an actual or estimated basis. Some ex post calculations made in the seventeenth century, and much later, were probably estimates of actual costs incurred, relying on the businessman’s intimate knowledge of the trade, rather than precise fi nancial calculations based on carefully maintained accounting records. This might well have been because the accounting records were insufficiently reliable or comprehensive to allow actual costs to be ascertained, or because the time and cost involved would have been unjustified in terms of the expected benefit to be derived from a more exact calculation, particularly in circumstances where the owner and/or manager remained in close contact with all aspects of day-to-day activity. In other cases, calculations were squarely based on records of actual costs compiled inside or outside a formal accounting system. Whatever the origin of the numbers used to better understand the fi nancial impact of business activity, we should not be surprised that the collection of cost data for industrial performance assessment and decision making was undertaken 400 years ago, and even earlier. Early seventeenth-century cost calculations made by Daniel Hechstetter, for example, required familiarity with the nature of copper making activities and the response of costs to changes in activity, but they were based on relatively straightforward procedures that could have been worked out by a literate businessman with a fair degree of common sense. Features of the industrial context within which cost calculations were made are next described.

3. PROTO-INDUSTRIALISATION Chapter 3 revealed that industry, when defined as ‘the organized action of making of goods for sale’ (http://www.thefreedictionary.com/industrialization; emphasis added), had its origins on landed estates and subsequently became gradually visible as a purely capitalist endeavour. The ‘spirit of capitalism’ is seen by some (Sombart 1902; Weber 1958; Winjum 1972) as manifest in the emergence of the domestic or ‘putting-out’ system during the sixteenth century as it replaced the declining guild system. The period of proto-industrialisation which continued throughout the seventeenth and much of the eighteenth centuries was marked by the growing involvement of the farming community in market-oriented craft production; an arrangement which was facilitated by the putting-out system organised by merchant

Pre-Industrial Revolution Cost Calculation

101

capitalists.5 Under this system, which dominated the production of cottons, woollens, lace, hosiery, glovemaking, straw-plaiting, and all types of metalwares from nails to trinkets, the merchant capitalist distributed raw materials to families who were paid on a piece-rate basis for their labour. The worked materials were sometimes then the subject of further processing by a different set of individuals, with such transfers needing to be carefully controlled. One of the main challenges for the entrepreneur, which accounting could help to address, was to develop a system of stock control that helped keep track of goods in the hands of out-workers and discouraged embezzlement; problems which Burley (1958) shows to have been a preoccupation of the mid-eighteenth-century Essex clothier, Thomas Griggs. The transition from the domestic system to factory-based production resulted from a process of trial and error that started in the seventeenth century in an endeavour to develop more efficient manufacturing procedures (Beckett 1977). Important characteristics of the modern factory were present in what has been described as the ‘proto-factory’. These included a significant investment in tools and implements, a labour force assembled within the ‘factory’ to enable its close supervision, the division of labour, and the development of production methods designed for ‘flow production’ (Mepham 1988a: 57–58). Each of these features was present in, for example, a number of Scottish linen ‘manufactories’ by the year 1700 (Marshall 1980: Chapter 6). The best known of these was the Newmills Cloth Manufactory, Haddington, established in 1681, which has been described as one of a number of ‘communal work stations’ that preceded the emergence of the ‘true factory’ (Marshall 1980: 142). It is the silk-throwing mill constructed by John Lombe near Derby in 1717 that is generally considered to be the fi rst example of the kind of factory that enabled close supervision and surveillance of the workforce. It was 500 feet long and five or six stories high, resembling ‘a huge barracks . . . with its automatic tools, its continuous and unlimited production, and the narrowly specialised functions of its [300] operatives’ (Mantoux 1928: 199). In King’s estimation, however, it was iron production that was probably fi rst fully industrialized. From the sixteenth century it used water-powered plant (furnaces and fi nery forges) and occupied its artisans full-time. Its main products (bar and rod iron) were then sold to ironmongers who organized their manufacture into nails and a host of other consumer goods under the proto-industrial domestic system. (King 2010: 385–386) The survey of early industrial accounting presented in this chapter relies on the fruits of research undertaken by numerous individuals. The major works used here are the study of accounting developments associated with copper smelting and iron making in eighteenth-century Wales by Jones (1985), the investigation into the industrial exploitation of estates (particularly the

102

A History of Management Accounting

extraction of coal) in the north-east of England also during the eighteenth century by Oldroyd (2007), and the examination of the Midlands charcoal industry between the mid-seventeenth and mid-eighteenth centuries by King (2010). Individual business-based studies drawn upon include Hammersley (1988; see also Edwards, Hammersley and Newell 1990) on mining and smelting at the Keswick works in Cumberland and Edwards and Boyns (1992) on the charcoal ironworks of the Derbyshire and Nottingham Company and the Duke of Norfolk’s Works in south Yorkshire. The national coverage is therefore patchy, but the kinds of factors that encouraged businessmen to think more deeply about how they might use numbers to help better manage their business was quite possibly indifferent to the geographical location of their works. To supply some understanding of likely contextual factors encouraging the development of industry and industrial accounting, the remainder of this section focuses on early industrialisation in Wales.

3.1. Proto-Industrialisation in Wales Stone (1965: 363) has demonstrated the ‘entrepreneurial exploitation of aristocratic estates’ by the nobility and the landed gentry during the sixteenth and seventeenth centuries. Indeed, early ironmakers were usually from the elite classes at that time. Sometimes their principal motivation (Stone 1965: Chapter 7) was to make effective use of unsaleable wood on their estates: ‘Thus the manor of Wentsland and Bryngwyn near Pontypool (Gwent) was described as “overgrown with great woods worth nothing for want of use of the same” until Richard Hanbury built an ironworks in 1576’ (King 2010: 387).6 It was eight years later, in 1584, that the first non-ferrous metal smelter was established at Aberdulais in the Neath Valley, in Glamorganshire, by the German mining expert Ulrich Frosse on behalf of the Mines Royal Company7 (Hughes 2005: 16). Neath remained, with Bristol, the main centre of the copper industry through the seventeenth century, but the focus then moved to Swansea, largely as a result of technological change. A major impetus for eighteenth-century industrial developments in Wales was the new and more efficient method of smelting copper ores in a reverberatory furnace using coal as fuel developed in Redbrook, Gloucestershire (King 2001–02). At about the same time, the deepening of Cornish pits and the introduction of gunpowder, for blasting, allowed the extraction of growing quantities of copper ore. Swansea became the centre of the copper smelting industry, not only in the United Kingdom but throughout the world, and was known as Copperopolis throughout the nineteenth century (Hughes 2005: vii). The Swansea region benefited from important locational advantages: its proximity to the sea; the availability, in large quantities, of suitable coals (required in the ratio of 3:1 with copper ore); and cheap local labour. Copper ore was brought in, initially mainly from Cornwall, and later from Anglesey. Approximately one half of all British copper

Pre-Industrial Revolution Cost Calculation

103

was smelted at factories in Neath and Swansea in 1750, and this increased to about 90% by the end of the eighteenth century (Hughes 2005). The manufacture of non-ferrous metals and iron involved heating or smelting appropriate ores in a furnace designed to extract the metal content and to remove impurities. The production process comprised a number of stages, although the exact method of manufacture varied from one metal to another. Copper production involved ‘smelting’, ‘melting’, ‘roasting’ and ‘refi ning’.8 In the case of iron making, the pig iron extracted from the blast furnace went through additional processes of fi ning and hammering in the forge to produce more flexible bar iron. The earliest Welsh applications of the reverberatory technique for smelting copper occurred at the Abbey works and the Melincryddan works, both located at Neath. The Melincryddan Lead and Copper Works, constructed between 1695 and 1698, has been described as the fi rst modern factory constructed in Glamorgan (John 1980: 17). It was built by the colourful ‘industrial entrepreneur and politician’, Sir Humphrey (or Humphry) Mackworth (Griffith 2004) who arrived in Neath in 1686 and was a central figure in the development of the local metal industries. The Neath Abbey Works was in operation by 1710, owned by a partnership of businessmen headed by Dr. John Lane, who is thought to be one of the first graduates of the University of Oxford to become an industrialist9 (John 1980: 22). In 1717 Lane built the fi rst Swansea Valley copperworks at Landore (sometimes called Llangyfelach). It consisted of 20 furnaces, a refi ner’s house, smith’s forge, blast house, rod mill, test house, laboratory and, notably, an accounting house.10 The factory ‘shell’ cost £2,000, and in the fi rst year of operations output comprised 80 tons of lead, 80 tons of copper and 1,300 ounces of silver. Lane, ‘a man of limited means but large ideas’ (John 1980), was bankrupted in 1724. The business was then run by Robert Morris, as receiver, until 1727 when it was taken over by Lockwood, Morris & Co. Also of interest, as an example of an early copper works constructed to undertake a series of industrial processes, is the White Rock Copper Works built under a lease (1736) which obliged the partners to erect within three years ‘one new copper smelting house . . . for smelting, making and refi ning copper or any other metals and to contain 20 furnaces at least with such warehouses, mills and other buildings as . . . [the partners] . . . should judge necessary and convenient’ (Roberts 1981: 141). Welsh metal manufacture therefore involved a series of industrial processes and the internalisation of labour within the factory at a relatively early stage. The metal industry was highly capital-intensive by contemporary standards consisting of not only buildings, furnaces and equipment, but also requiring heavy investment in materials, which turned over slowly, and in the long periods of credit allowed to customers. It has been estimated that the average investment per worker in 1800 was £500 (Roberts 1980: 56). The accounts of the Landore works for 1745 suggest that the figure may have been of a similar magnitude much earlier in the eighteenth century.

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The balance sheet of this organization, employing approximately 40 workers, showed a fi xed capital investment of £20,000 and a total balance on the partners’ capital and current accounts of £34,859 (Jones 1985: 34). Assuming an interest rate of 5% on capital invested gives an interest charge which was probably of a broadly similar magnitude to the wage bill. In the next section the cost and management accounting practices developed by businessmen in Wales and elsewhere in Britain are examined.

4. INDUSTRIAL COST CALCULATION PRACTICES TO 1760

4.1. Cost and Profit Calculations The early development of iron-making in Wealden, east Sussex, was examined by Straker (1969) who reproduced or derived a number of cost calculations from business records covering the period 1330–1773.11 Of particular interest is an estimate of the cost of producing one ton of bar iron at Newbridge in Ashdown Forest furnaces and forge in 1539 and an annual cost estimate for the Heathfield Furnace for 1746 (Straker 1969: 196, 199). Later studies of iron making in this part of England include Crossley’s examination of the Sidney Ironworks accounts for the period 1541–73. He found that a balance described as ‘clear gain’ was calculated, annually, by taking the market value of iron produced together with the market value of the net increase in stocks of raw and semi-fi nished goods and deducting from these amounts payments made (Crossley 1975: 27; see also Crossley 1966: 275). Crossley (1975: 27) further reveals that the inclusion in these calculations of expenditure not strictly relevant to iron making declined after 1550 when ‘William Blackenall probably took over as clerk’. Another early example of cost fi nding is contained in a document issued in 1620 by the London members of the Worshipful Company of Bakers, which includes a careful build-up of the weekly costs of production. This document was produced in response to price controls. Under the English Bread Assize of 1266, bread prices were fi xed but the baker was allowed to vary the weight of loaves in response to changes in the price of grain, according to a set scale of weights and grain prices. This system was designed to ensure that the price was high enough to cover the baker’s profit, set at two loaves plus bran sales per quarter of wheat, and estimated cost of production. The purpose of the document was to support a claim for an increase in the allowance made for production costs (Forrester 1978a: 10–11; see also Garner 1954: 31–33). These examples show two distinct approaches to cost calculations: the use of cost estimates and the compilation of detailed cost statistics. An estimate of production potential at Keswick is made in a 1567 communication from George Needham to Sir William Cecil, both subsequently shareholders in the Company of Mines Royal:

Pre-Industrial Revolution Cost Calculation

105

I fi nd by daily proof, one of our furnaces [in Keswick] will smelt every day 16 cwt. 12 of copper ore. So 6 furnaces will smelt yearly, reckoning 282 working days, 27,072 centners. By such proof and information as I have learned, every centner of ore will yield as clearly in copper, gold and silver 10/-. So, by this account, the mines here will yearly be worth £13,536. (reproduced in Donald 1994: 216) It is likely that this broad estimate was backed up by more detailed calculations. Certainly Donald (1994: Chapter 10) demonstrates that many such measurements were made. A number of later calculations taken from the business notebook of Daniel Hechstetter, the German manager of the Keswick copper works between 1597 and 1633, are reproduced in Edwards, Hammersley and Newell (1990).13 The nature of the calculations indicates a number of different purposes.14 ‘Trial smeltings’ of copper ore took place which might have been used either to decide whether to continue with production or, perhaps more likely, to supply the yardstick against which future actual results could be measured. The trial involved processing ‘100 Table 5.1

Trial Smelting of Coniston Ore, c.1600 £ s. d. £ s. d.

Bringing 100 K of Coniston copper ore to the roast: 42 horse loads (of peat?) at 6d labourers’ wages Melting ore for 13 days to produce 47 cwt of greenstone ‘at the least doth cost 10s’ per day Roasting greenstone in five fires: 60 loads of peat labourers’ wages Further melting of greenstone, four days at 9s. per day Further roasting in four fires: 24 loads of peat labourers’ wages Cost of melting the roasted iron Further costs associated with melting 12¼ cwt of ‘blacke copper’ and 6 cwt of copperstone: 1 fathom of roasting wood 12 horse loads of peat labourers’ wages Cost of further melting in the refiner’s furnace—one day Carrier of coal Allowance for charcoal, 10½ seams at 40d. each Cost of making 13 cwt 2 quarters of ‘good rough copper’

1

1 0 3 0 1 4 0

6 10

0

1 10 0 6 0 1 16 0 1 16 0 12 1

0 0

9 0 6 0 1 6

13 0 10 0

16 6 16 0 7 1 15 0 15 17 1

Source: Edwards, Hammersley and Newell (1990: 68). See Hammersley (1988: 122–124) for original wording.

106

A History of Management Accounting

K15 of Coniston copper ore’ (see Table 5.116) to discover ‘what 1cs of Copper soe made out of that quantity doth cost’. The cost statement (see Table 5.1) sets out the various labour and material costs involved in the conversion process. The inclusion, in some cases, of round sum daily allowances may be either indicative of a broad estimate, the outcome of a detailed cost calculation which is not disclosed, or the subcontracting rate for the work. Estimates were also made of the actual costs incurred in extracting minerals and manufacturing rough copper and copper vessels. Table 5.2 contains an estimate of rough copper manufacturing costs for a ‘shift’17 dated sometime between 1598 and 1603. There are five stages in the financial analysis: 1. Cost of copper ore consumed in an individual shift 2. Labour and material costs associated with each stage of melting and roasting 3. The produce of a shift—11 ⁄5 cwt of copper—is expressed in terms of cost per cwt, distinguishing between the cost of the initial copper ore input and conversion costs 4. ‘Extraordinarie charges’, expressed as annual amounts, comprise three elements. First, there are the costs associated with the manufacture of rough copper and copper vessels which are apportioned two-thirds to the former and one-third to the latter. The two-thirds is divided by the expected yield of 468 cwt to give a cost per cwt. Second, the one cwt share of ‘Further annual charges’ is identified and, third, 1d. is added for hogs’ grease 5. The royalty due to the Queen Hechstetter then considers the implications of his calculations, and again displays a fairly clear awareness of differential cost behaviour and the impact on cost per unit if the quantity of copper ore mined fell below expected production when stating: ‘yf 72 kibles of ewere [copper ores] be not gotten weekely the certaine charges of the officeres and reparations must be charged upon that which is gotten which will then add an increase of charges upon a quintall’ (Hammersley 1988: 117). The impact of changes in the yield from copper ore is also explored (Hammersley 1988: 117): if the ewers prove leaner than 8 kibles [per] quintall18 the charges of makeinge the quintall will increase and beinge willde will consume more tyme and labour in rosteinge. But yf more kibles the 72 shall be weekly gotten or the ewers grow richer they viijd [8] kibles to yeald a quintall or the rocke softer then this chardge will abate. Table 5.3 takes these calculations a step further by estimating the cost of making copper vessels from 1 cwt of rough copper. The stages are as follows:

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Estimated Cost of Making 1 cwt of Rough Copper from 9½ Copper Ore in a Shift, c.1600 s. d. £ 2 barrowfulls of Coniston ore, plus 2 barrowfulls of Newland ore, plus 2 barrowfulls of once roasted Coniston ore, equals 9½ cwt at 4s. 3d. per cwt 2 9 loads of peat for the furnace at 6d per load 4 6 5 loads of stonecoal at 8d. 3 4 Coal dust and white clay for plaster (?) 2 Limestone to make copper ore run 6 Master melter per week 9s. 2 other melters at 5s. 10 3 workmen at 3s. 9 28 15 shifts a week to take account of holidays and ‘casualties’, 1 10 gives per shift

cwt of

Table 5.2

Cost in labour and peat in further roasting ‘each fire greater than another’ Separate roasting of the Coniston ore Cost in labour and peat of first melting in smelting furnace Peat and wood costs for six or seven further roasting of copper stone Cost of bringing roast copper ‘to perfection’ in great furnace and transferred to the finery where it is refined ‘with purest charcooles and made into rough copper’ 8 loads of peat 3 loads of stonecoal Extraordinary plaster Melters Carrying coal Charcoal For six cwt, which for 11/5 cwt is Total cost of 11/5 of rough copper Equivalent cost of 1 cwt of copper ore making into rough copper Extraordinary charges, per annum Watchman at 6d. per day gives, per annum Three labourers to carry peat and coals to the furnace and hammer at 8s. per week gives £20 8s.0d.1 Buckets, rods, sieves and trays Two thirds (one third charged to production of copper vessels—see below) 468 cwt produced in a year, gives for 1 cwt

s. d.

0

4

10 4 5 0 10 3 0 2 6

s. d. 4 0 2 0 0 4 1 10 3 7 6 3 1 1 2

3 5 14 0 14

2 2 0 8 8

£ s. d. 9 2 6 23 8 0 3 0 35 10

0 6

23 13 8 1 01/8 Continued

108

A History of Management Accounting

Table 5.2

Continued s. d. £ s.

Further annual charges: Blacksmith’s charges for repairing tongs, forks, water wheels, and the tubes conducting air to the furnace Renewing and repairing bellows Lamp oil for melters Candles for watchman 468 cwt produced in a year, gives for 1 cwt2 Hogs’ grease (lubricant for bellows) for 1 cwt Royalty

d.

£10 5 1 1 17 93/8

1 91/2 1 3 111/2 3 0 6

Notes: 1. It seems likely that either the 8s. per week or the £20 8s 0d. is a mistake as a figure of £23 8s. 0d. is needed to balance the list with all the other totals provided. 2. Does not exactly tally. Source: Edwards, Hammersley and Newell (1990: 72–73). See Hammersley (1988: 114–117) for original wording.

1. Cost of 1 cwt of rough copper, as calculated in Table 5.2 2. Labour and material costs involved in forging and metal polishing 3. Annual charges from blacksmith plus the ⅓ apportionment of the ‘extraordinarie charges’ (as calculated above), divided by expected output to produce figures for cost per cwt 4. Labour and materials involved in the repair of fi xed assets plus travel costs and a clerk’s wages 5. Total cost is compared with the sales price of copper vessels 6. Estimated profit per cwt is multiplied by the estimated annual produce of rough copper (437 cwt)19 to give a forecast of yearly profit 7. The existence of unrecognised further costs is acknowledged The calculations are again supplemented by a narrative which indicates an awareness of the effect of possible changes in the level of production, and also the need for differential pricing in certain geographical areas. Apparently the fi rm was willing to accept a price of less than ‘xiiij nobles’ (14 x 6s. 8d. = £4 13s. 4d.) for copper in London because this low price was balanced by the fact it could sell some at £5 12s. 0d. (Hammersley 1988: 118). Moving a century forward in time and, geographically, 300 miles south of Keswick to the Landore works in the Swansea Valley, records that survive from the 1730s contain a detailed estimate of the cost of making one ton of copper. Table 5.4 sets out the various direct costs (materials, labour and expenses) of smelting and refi ning for the various stages of production: calcining, melting, roasting, and refi ning. Carriage inwards is included, as are allowances for candles, smithwork and repairs to furnaces at each stage. Added to the total direct costs of production are certain indirect

Pre-Industrial Revolution Cost Calculation

109

Table 5.3

Estimated Profit Arising from the Conversion of 1 cwt of Rough Copper into Malleable Copper and Forging into Vessels, c.1600 £ s. d. Cost of manufacturing 1 cwt of rough copper 3 0 6 Forging sub-contracted to Sebastian Dibler and his son 9 0 Vessel polishers: Labour 1 7 Materials (vinegar and salt) 2 Smiths charges, hammers, barrows, iron and steel 91/4 Wages of watchman and labourers to carry peat and coal allow61/4 ance for scuttles, etc. 3 12 61/2 Wages or Mr. Carpenter and son, per annum £39 Timber for repairing bellows, water wheels, hammer, shafts, 20 barrows Travel costs and clerk’s wages 24 83 Proportionately, per cwt. on 437 cwt 3 93/4 Sum total of all charges 3 16 41/4 Copper vessels sold at melting house, per cwt 4 10 0 Profit ‘clearly gained’ 13 8 Which for 437 cwt per year is 299 1 5 Out of which sum is to be deducted the ‘officers’ allowance, yearly rent and interest on money above £1,200 stock Source: Edwards, Hammersley and Newell (1990: 74). See Hammersley (1988: 117–118) for original wording.

costs, such as the salary of an agent, rent of premises, sales commission charges, and freight costs in transporting copper from Neath to London (Jones 1985: 22–23). A similar exercise was undertaken at the Pontypool Forges in 1704 by John Hanbury who calculated the total cost of making 300 tons of bar iron over 12 months. The result was divided by 300 to give a cost per ton of £13 2s. which compared favourably with the estimated selling price of £15 (Jones 1985: 13–14). Particularly notable, in this and other exercises described by Jones, is the careful thought devoted to the preparation of estimates. Hanbury recognises that some of the costs might appear to some people to be a little low, but takes the view that this is compensated by the fact that some of the costs are probably generous. In contrast to this cost estimate, Daniel Peck, proprietor of a lead works in Flint, prepared a calculation in 1707 which set out the actual direct cost of the weekly output (distinguishing between smelting, refi ning and conversion costs), the values of the products and by-products produced, and a comparison of the two totals to reveal the ‘weekly profit’. This was multiplied to produce an annual figure from which certain overhead costs were deducted, leaving a residual annual profit figure (Jones 1985: 15, 18). 20

110 A History of Management Accounting Table 5.4 The Cost of Making a Ton of Copper at the Landore Works in the 1730s The Charge of Making a Ton of Copper When the Ores Produce One in Ten The ore that yields one ton of copper out of ten ton 60 0 0 of ore will cost £6 per ton which amounts to The carriage of the ore to the waterside to be shipped 3 0 0 for Neath will cost 6/– per ton The freight from Cornwall to Neath at 5/– per ton 2 10 0 The charge of carriage from Mellingrythan up the 10 0 66 0 works at 12d per ton Smelting of ten tons = calcining with 3 for one ton of coal 2 men one week 4/– per week each 0. 8. 0 Coals, one way at 1. 3. 0 for candles, smithswork and repair of furnaces 0. 4. 0 1 15 0 Melting Furnaces—3 to be used 6 men at 6/– per week each 1.16.0 Coals – 4 weys at 23/– per wey 4.12.0 Candles, smithswork and repairs 0.12. 0 7 0 0 Roasting Furnaces—3 to be used 4 men at 6/– per week 1. 4. 0 Coals—2 weys 2. 6. 0 Candles, smithswork and repairs to furnaces 0. 6. 0 3 16 0 Refining with one furnace 2 men 3 days 0. 6. 0 Coals—½ wey 0.11. 6 Candles, smithswork and repairs 0. 5. 0 1 2 6 13 13 79 13 N.B. Salary to the Agent at the Works per week 1. 0. 0 2. 0. 0 Ditto to the Refiner 1. 0. 0 Ditto to the Agent to buy the ore & 2. 0. 0 also rent of workhouses per week 6 0 0 There is a further expense of sending the ton of copper to London Freight from Neath to London, 15/– per ton 15 0 Commission and storeages in London at £2 per cent 2 0 0 8 15 88 8 No date 1730s (?)

0

6 6

0 6

Source: Jones (1985: 23).

Turning to the textile industry, Burley (1958) reports on the accounting system operated by Thomas Griggs of Essex between 1742 and 1760. Five main processes were employed in the production of cloth: wool

Pre-Industrial Revolution Cost Calculation

111

sorting, cleaning, combing, spinning and weaving. The fi rst three stages, which appear to have involved relatively little by way of labour and capital requirements, were performed on the premises, while the remaining work was undertaken by approximately 500 outworkers. Surviving records focus on the activities of the latter, presumably because records were not required to provide information about transactions under the owner’s direct supervision. The records have been likened by Burley (1958: 54) to those maintained by the Medici family in Florence almost 200 years earlier, but Griggs’ records seem significantly less developed: they are not on the double entry basis, they do not contain overheads, and the fi nancial data is fairly patchy compared with the reasonably comprehensive cost calculations contained in the Medici records (de Roover 1941; Burley 1958: 217). Perhaps of more interest are the 40 or so ad hoc direct cost calculations made for various fabrics between 1749 and 1759, a time when demand was low and direct costs were high. Poor results and unfavourable market conditions seem also to have stimulated the cost-consciousness of Wedgwood in 1777 (McKendrick 1970: 49; see Chapter 6). Moving attention to the north-east of England enables us to engage with another ‘industrial society in a “pre-industrial” world’ (Levine and Wrightson 1991: 76) where the accounting implications of industrial developments on landed estates have been the subject of significant study by Oldroyd. His work has yielded plentiful evidence of profit calculations in the period to 1760, particularly on the Bowes estates which he concludes ‘were managed as profit centres, as evidenced by the systematic nature of the accounting and management arrangements and the focus in the accounts on making activities profitable’ (Oldroyd 1999: 177). Examples of accounting practices include: profit statements and unit cost calculations for batches of lead mined and smelted (Oldroyd 2007: 115); and annual profit or loss calculations on the salt yielded by Middleton’s various salt-pans. Corresponding calculations made elsewhere on north-eastern estates include the profit and loss account prepared for the Lumleys’ coal operations in County Durham, in 1730, which lists 11 different categories of cost, while profit and loss accounts for the mines were ‘further analysed over a six year period (1723– 1729) in order to arrive at average annual profits’ (Oldroyd 2007: 116). Returning to the affairs of the Bowes family, Oldroyd further deduces that a principal purpose of profit statements was to hold stewards accountable for the degree of success of the operations for which they were responsible. Results were carefully dissected and explanations sought for poor performance. For example, the Middleton’s salt-pans profit and loss account (1757–1760) was annotated to the effect that the reported loss would have been reduced by £151, had it been possible to maintain a selling price of 40s a ton instead of the actual prices which ranged from 28s to 40s. (Oldroyd 2007: 118)

112

A History of Management Accounting

According to the modern management control theorists Emmanuel, Otley and Merchant (1985: 25), ‘A vital part of the control process, and one with which accounting is particularly concerned, is the measurement of actual performance so that it may be compared with what is desired, expected or hoped for’. The evidence presented in this sub-section has demonstrated the timelessness of this assertion.

4.2. Choosing Between Alternatives The examples presented in the preceding section demonstrate how accounting data were used to estimate and calculate actual costs incurred and to measure profitability. There is relatively little evidence of the precise use made of such information, but the nature of such calculations certainly implies a strong interest in planning and the desire to monitor performance. Studies of the archives also yield numerous examples of businessmen utilising accounting techniques which were undoubtedly exploited to make resource allocation decisions. In the late sixteenth century, Hechstetter calculated the effect on profit of selling copper in a different geographical area and also the impact on cost of changing the level of production (Hammersley 1988: 117–118). The fuel used to run iron-making furnaces, prior to coal, was charcoal, and this was often the largest variable cost (Hyde 1973; King 2010: 389). It is therefore perhaps unsurprising to fi nd that eighteenth-century managers of charcoal iron-making enterprises employed accounting calculations to ensure, where possible, 21 the least-cost supply of that source of energy. The eighteenth-century records of the Derbyshire and Nottingham Company and the Duke of Norfolk’s Works in south Yorkshire reveal that charcoal was obtained in batches of varying size from a wide range of geographical locations—some far distant—with detailed calculations made of their cost both inside and outside the DEB system. The total batch costs were then expressed as an average per dozen, 22 providing a common unit for comparative purposes and a fi nancial basis for future purchasing decisions (Edwards and Boyns 1992: 163, 167). Jones (1985: 22) draws attention to a number of examples of accounting exercises undertaken on the Mackworth Estate to help answer the question, ‘What if we did this rather than that?’ The Court of Directors of the Company of Mine-Adventurers of England (incorporated 1698) arranged for its accountant to compare the cost of smelting, refi ning and reducing ore by Mr. Hawkins at Neath compared with Mr. Waller at Garreg (Gwynedd) over a 12-month period ending January 1707. Mr. Horne, the accountant, reported that 69 tons of ore was raised each week, or 3,450 tons in a year of 50 weeks, and that this enabled 1,725 tons of lead to be produced. Further calculations revealed a total profit of £7,575 12s. 6d. in favour of Neath, comprising reduced costs of smelting £2,436 11s 3d., refi ning £2,156 5s. 0d. and reducing £2,982 16s. 3d. (Company of the Mine-Adventurers of England 1709: 1–2).

Notes: * Column only sums to £603 1s. 6d. Source: Jones (1985: 27). The original data was presented in eight separate statements spread over four pages of manuscript (Jones 1985: 26).

Tonnage of Copper made weekly and valued at £105 per Tun Gained weekly by Do at Redbrook (Neath)

Neath

50 Tons 60 Tons 70 Tons 80 Tons 50 Tons 60 Tons 70 Tons 80 Tons £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. £ s. d. 322 10 0 387 0 0 451 10 0 516 0 0 322 10 0 387 0 0 451 10 0 516 0 0 7 10 0 9 0 0 8 15 0 10 0 0 7 10 0 9 00 8 15 0 10 0 0 25 0 0 30 0 0 35 0 0 40 0 0 25 0 0 30 0 0 35 0 0 40 0 0 13 15 0 16 10 0 19 5 0 22 0 0 10 0 0 12 0 0 14 0 0 16 0 0 7 10 0 900 10 10 0 12 0 0 3 26 3 15 0 4 76 5 00 1 5 0 1 10 0 1 15 0 200 – – – – 62 10 0 75 0 0 87 10 0 100 0 0 39 7 6 45 0 0 55 2 6 63 0 0 3 10 0 440 4 18 0 5 12 0 3 10 0 4 40 4 18 0 5 12 0 4 10 0 80 610 740 3 76 4 10 4 14 6 5 8 1 40 40 140 1 40 18 0 18 0 18 0 18 0 1 10 0 1 16 0 220 2 80 1 00 1 40 1 8 0 1 12 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 14 0 5 00 600 70 0 8 00 5 00 6 00 7 00 8 00 6 00 700 70 0 8 00 6 00 7 00 7 00 8 00 5 00 600 60 0 7 00 5 00 6 00 7 00 8 00 468 2 0 561 0 0 649 18 0 742 16 0 433 13 6 517 10 0 *604 16 6 688 18 0 525 0 0 630 0 0 735 0 0 840 0 0 525 0 0 630 0 0 735 0 0 840 0 0 56 18 0 69 0 0 85 2 0 97 4 0 91 6 6 112 10 0 130 3 6 151 2 0

Redbrook

Comparative Costs and Profits of Producing Copper at Redbrook and Neath, c.1740

Costs: Oare yielding 1 in 10 upon an average Salary and incidental expenses in buying Carriage, wharfage and shipping in Cornwall Freight from St Ives to Chepstow (Neath) Carrying in Lighters Chepstow to Redbrook (loading and carrying to Works) Carrying from the Lighters to the Works Coale to work up each tun of oare Wages to work Melting Furnaces Wages to work the Calciners and Roasters Wages to work ye Stampers, grind clay and make Bricks Wages to Labourers To a Mason and his assistant To a Smith and Carpenter Refining (1 tun of copper) Wear and Tear, candles, Tools and petty incidental weekly, about Rent and salary to Agents at Redbrook (Neath) 2/- on each tun of oare

Table 5.5

Pre-Industrial Revolution Cost Calculation 113

114 A History of Management Accounting The owner of the Landore copper works, Robert Morris, produced figures in 1728 to demonstrate, as erroneous, the established view that it was cheaper, and therefore more profitable, to work rich copper ore rather than poor copper ore (Jones 1985: 19).23 At the Melincryddan works, in about 1740, an investigation was undertaken to determine the relative costs of manufacturing copper at various levels of production at Redbrook in Gloucestershire or Neath in Glamorganshire (Jones 1985: 30). Calculations were made of the costs of producing and selling 50, 60, 70 and 80 tons of copper per week at each location (see Table 5.5). Some costs, such as copper ore purchased in Cornwall, were the same at both locations. Other costs differed, such as freight costs which were greater for St. Ives (in Cornwall) to Redbrook than for St. Ives to Neath. Of the 16 elements of total cost, 10 were treated as directly variable with production, 3 as semi-variable, and 3 as entirely fi xed. The total cost calculations were then compared with estimated sales revenue to show an advantage for Neath at each planned level of production. This cost-benefit analysis is therefore also of interest because it demonstrates recognition of a clear distinction between fi xed and variable costs, something not made entirely explicit in the literature until Charles Babbage did so in 1832 (Parker 1969: 59–60). The fi nancial analysis is accompanied by a splendid discussion which starts by outlining the various economic conditions which must be favourable in order to justify siting the works at a particular location. An assessment is then made of the extent to which these desirable features were available at the chosen location compared with other copper works. Care is taken to point out the uncertainty which attaches to some calculations compared with the reliability of others. For example, ‘The last article of £4 a week for wear and tear is no doubt lyable to more uncertainty, than any of the rest; I can only say that I have consulted several who are supposed to have good judgement in these matters and they think it would not amount to so much’ (quoted in Jones 1985: 30). The Tredegar manuscripts record consideration being given by lessors to the renewal of a lease yielding £150 per annum in 1746, or whether instead to take over and operate the iron works located on the land (Jones 1985: 187–189). The lessors estimated that £7,600 would have to be invested to cover the cost of fi xed assets and operating expenses over the fi rst 12 months. The conclusion reached was that a minimum of £530 would have to be generated to cover interest at 5% on £7,600, namely £380, plus the rental foregone of £150. This is an interesting early attempt to apply the opportunity cost concept to industrial decision making. Turning to the north-east of England, a ‘large number of planning schedules have survived relating to the estate and other interests of the Bowes family’ (Oldroyd 2007: 119) that were designed to identify options which would reduce costs or increase profits. In 1742 Bowes looked into the possibility of building a new mill at Isabell Meah Hill (Oldroyd 2007: 119, 121), where lead was mined, rather than continuing at the present site some distance away. The

Pre-Industrial Revolution Cost Calculation

115

exercise indicated a saving of just under £60 on 600 ‘bing of oar’ (Oldroyd 2007: 121) due to differential capacity at the planned new mill at Boylup and the resulting savings in transportation costs. The many other examples of ex ante cost/profit calculations for lead manufacture were mirrored by similar reckonings for coal mining activities, for example to help decide whether to ship coal mined from the Birtley Fell colliery to either the River Tyne or River Wear for onward transportation (Oldroyd 2007: 120). Plentiful surviving estimates of production costs and profits for the Grand Allies, where George Bowes was a partner (Oldroyd 2007: 122–129), are contained in a partnership minute book. The accounting data were designed to enable a range of decisions to be made including whether to continue working or to close particular collieries and how best to access available coal (Oldroyd 2007: 123). There is also a focus on profitability in different market conditions, such as the 1727 assessments of the profitability of the Urpeth colliery in ‘“contesting”, “fighting” and “peaceable” trades’ (Oldroyd 2007: 132). We can therefore see that a wide range of business decisions—such as whether to produce, how much to produce, what price to charge, where to locate a works, what quality of materials to employ, whether to close down, whether to lease or work a property, and how to transport goods to consumers—were the subject of financial analysis before 1760. Not all the calculations were prepared in the manner that would be employed today and, again as today, some of them probably resulted in wrong decisions being reached. But the mere fact that a wide range of insightful calculations were made shows that businessmen believed they provided a useful input to the management decision-making process. In the remainder of this section on industrial cost calculation practices to 1760 we focus on issues of depreciation and interest24 and the extent to which DEB featured in the accounting systems used, principally, to exploit resources on landed estates.

4.3. Depreciation and Interest The treatments of depreciation and interest are of keen interest to accounting historians, both because they have been the subject of diverse treatment if, indeed, they are recognised in the accounts, and because their inclusion is portrayed as evidence of a capitalist mentality (Bryer 2000a, 2000b, 2006a). Jones (1985: 100) has suggested that the late appearance of depreciation within business records is due to the fact that the earlier organization of business activity often rendered it possible to identify almost all expenditures directly with production. Properties were often leased rather than owned (Edwards and Boyns 1992: 163) with the result that the rental charge could be included as a cost of production. Moreover, in the case of an ironmaker, for example, the furnace and equipment (such as the bellows and water wheels) would have a long life, perhaps extending over the entire period of the lease, so it was considered sufficient to charge associated maintenance and repair

116

A History of Management Accounting

costs to production. Indeed, the word depreciation is nowhere found in the extensive range of records that Jones surveyed. He finds various references to wear and tear, though this might only refer to the cost of keeping an asset in good condition. For these reasons, we cannot be certain that the inclusion by Robert Morris of a charge of 2s. 6d. for ‘wear of furnace’ (Jones 1985: 19, 158) when computing the charge of refining a ton of copper in 1728 was intended to reflect asset depreciation; but it may have been. In his study of the Midlands charcoal industry, King (2010) found few references to fixed assets, concurring with Jones that this was because ironmasters usually leased the plant they used. Expenditure on fixed assets, when it did occur, was normally written off ‘immediately against revenue, as when Blakeney Furnace was rebuilt in 1692 at a cost of £324’ (King 2010: 403). However, King (2010: 403) does reveal that ‘John Wheeler was allowed £50 per year for seven years over and above the lease rents in lieu of a ‘fine [premium] formerly paid by him and for erecting Cookley Forge’. Furthermore, when the Ironworks in Partnership bought Grange Furnace from Philip Foley after Richard Wheeler’s bankruptcy (paying £300 for the furnace and £55 for Richard’s stock), a dead rent of £20 was charged against profits for some years until the cost was written off, although the furnace was never used. (King 2010: 403) Following building work at the Carburton Forge, by the Derbyshire and Nottingham Company c.1700, the forge account for 1701 contains a figure for previously incurred capital expenditure of £250 described as: ‘yett stands out the money laid out in building/£50 being thrown off in this account’, so that the balance carried forward in 1702 was reduced to £200 (Edwards and Boyns 1992: 163). 25 Recognition of the impact of capital costs on profitability also features in the archives of the Heaton Colliery near Newcastle upon Tyne. The viewers’ estimated cost of sinking (1727), of £470, contributed to an estimated unit cost per ten 26 of 15d. It was further calculated that the cost would fall to 9½d. per ten if 12,000 tens could be extracted, but a compromise charge of 12d. per ten was included in the overall computation of unit profit which followed (Oldroyd 2007: 125). Oldroyd (2007: 125) emphasises the fact that such treatment ensured recognition of depreciation and a clear distinction between capital and revenue expenditure. Differentiation between building costs and running expenses also featured in projections of lead production (Oldroyd 2007). Moving between industries to the New Mills Cloth Manufactory of the late seventeenth century, ‘wear and tear of Equipment’ was measured (Walsh and Stewart 1993: 785) and specifically used to determine product cost (Toms 2010: 215). In addition to the problem of deciding which overhead costs to recognise, there is the question of how to apportion them between different activities once one moves below the level of the fi rm. The Duke of Norfolk’s

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Works again provides an early example of how this kind of problem was resolved. When the fi rm paid a £460 premium on the lease of two forges and a furnace for the nine years commencing Midsummer 1727, £52 was written off in the fi rst year and the remaining £408 carried forward and amortized in eight annual instalments. The annual charge was apportioned 2:1 between the two forges, but no explanation was given for the failure to charge anything to the furnace. Recognition of the need to apportion joint costs between activities benefiting from the expenditure is also reflected in the allocation of one-fourth of ‘land tax and window money’ to each of four profit centres (Edwards and Boyns 1992: 163). The inclusion of an interest charge in the routine post fact accounts was usually confined to partnerships, where the deduction was designed principally to ensure that individuals were properly remunerated for differential capital contributions rather than to produce a more accurate costing of business operations, for example in the ‘Ironworks in Partnership’ accounts for 1692–93 (King 2010: 400). Elsewhere, Mepham (1988a: 67) tells us that the accounts of the British Linen Company for 1748 include an interest charge as part of the agreed profit sharing scheme between the partners. Concerning the treatment of interest as a business cost, we have seen that financial calculations prepared for Welsh companies, to enable management to assess performance and choose between alternatives, sometimes incorporated an allowance for interest at five per cent. Where interest was charged the use of 5% was commonplace, being the maximum legal rate of interest from 1714 to 1854 (Temin and Voth 2008). For example, it is the rate used in the 1746 cost estimate for the Heathfield Furnace (Straker 1969: 200). In the north-east of England, Oldroyd (2007: 133) discovered viewers including, in a payback calculation, interest at 5% on a loan of £30,000 required to fund planned capital expenditure on the Heaton Colliery in 1736. Toms (2010: 216) believes that the ‘use of forecast rates of return was common [practice] throughout the eighteenth century’. Certainly, John Wyatt was of the view that a textile fi rm set up with 300 spindles should earn an annual profit of 10–15% on ‘dead or quiescent stock’ and at least 20% on capital ‘employed in the trade’ (Wadsworth and Mann 1931: 439). An earlier post factum application of such notions, though there is no evidence that this was widespread practice, occurred when Robert Morris estimated, ‘Profit from May 1727 when Partnership [Lockwood, Morris & Co., copper makers] was formed to Michaelmas 1728 was about £2,900, which upon a capital of £10,000 was 23% per annum granting the time to be one year and a quarter’ (Jones 1985: 20).

4.4. DEB-Based Accounting Systems We have seen evidence of formal accounting systems designed to provide decision-useful information for landowners and merchants (Chapters 3 and 4) and, of course, a similar process occurred in the arena of industrial

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accounting. The incorporation of cost calculation within a system of DEB may be portrayed as something of a two-edged sword. Where ex post cost figures are prepared outside a formal system of bookkeeping, cost-conscious businessmen might decide that a natural development of their accounting procedure should involve modification and expansion of the system of fi nancial accounting to incorporate cost calculations. This change increases the arithmetic accuracy of the data—there being less chance of omitting costs within the more secure double entry accounting framework—and makes it possible to produce a range of accounting reports on a regular basis. Nevertheless, businessmen also have to consider the additional cost of operating such a system and assess whether or not it is advantageous to produce cost information on a systematic basis. A modern criticism of integrated financial and cost accounts (esp. Johnson and Kaplan 1987) is that they tend to result in the production of routine reports which generate information increasingly unrelated to that required by managers for the kinds of decisions they need to take in a changing business environment. It is also the case that the arbitrary apportionment of overheads to cost centres—to ensure that all costs are ‘accounted for’— produces total cost figures which are not always the most appropriate for business decision making. They are generally judged to provide a reasonably adequate yardstick for performance assessment and long term pricing decisions, but not for short term pricing and production decisions which are more rationally based on the marginal costs and revenues associated with a particular option. 27 Thus, ‘integrated accounting systems’ (see Chapter 9) should not necessarily be regarded as the most useful or appropriate systems for cost calculation purposes. The inclusion of cost data within the ledger was nevertheless an innovation in accounting practice that facilitated the regular appraisal of performance in the workplace, but it did raise measurement issues for managers to resolve. When the processing of goods was typically organised through the domestic system that flourished in the seventeenth and eighteenth centuries, the calculation of profits from different activities could be based on values legitimated by external transactions. Once a company internalises a multi-process activity, and perhaps mechanises it to achieve ‘flow production’ (Mepham 1988a: 59), the preparation of departmental-based process accounts requires a decision to be made about how inter-departmental transfers are to be valued. The options are cost, market price or an accounting price produced as the result, perhaps, of negotiation between departmental managers. Each method of transfer pricing naturally fulfi ls different purposes. The use of total cost figures enables cost-based measures of operating performance, relevant data for the identification of waste, and the ability to assess the effect of technological or organizational innovations. Use of cost-based transfers also avoids the inclusion, in stock, of unrealised profits that might be seen to affect the comparability of cost figures over time, or to confl ict with the application of the realisation concept 28 for the

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purpose of external reporting. The use of market price, on the other hand, enables identification of the relative profitability of different products and processes for performance measurement purposes (e.g., the achievements of departmental managers) or decision-making purposes (e.g., to decide which parts of a business to expand or contract). The business records examined reveal a variety of procedures employed. It is well recognised that the development of the vertically integrated plant to secure sources of supply and outlets for goods manufactured, or simply to organise the flow of goods from raw materials to the ultimate consumer more efficiently, and thereby drive the ‘slack’ out of market transactions, produced new challenges for accountants. Although vertical integration might properly be regarded as an important feature of twentieth century industrial development, it is by no means a phenomenon confi ned to the modern era. For example, the degree of integration within the charcoal iron industry was sometimes substantial (Hyde 1977: 15). In the vicinity of Sheffield, the Duke of Norfolk’s Works comprised four furnaces, three forges and a slitting mill (Edwards and Boyns 1992; Raistrick and Allen 1939). There, transfers between processes were made at values approximating market price in 1750–51, thus enabling departmental profits or losses to be calculated (Boyns and Edwards 1992: 161). 29 King (2010) is the fullest study of the early use of DEB for industrial accounting purposes. He identifies two basic systems of DEB which can, themselves, be distinguished in two ways. One of the systems employed a journal, which King (2010: 385) refers to as the ‘classic Italian method’, to collect transactions together prior to posting them to the ledger. The nonjournal system contained no nominal and, perhaps also, no real accounts. Costs and revenues were instead recorded in the personal, charge-discharge type, accounts of clerks, with the net balance then transferred to a gain or loss account, namely the system emphasised the accountability of the individual. It was the classic Italian method that was in use at the Duke of Norfolk’s works, and King (2010: 396; 2011) has demonstrated its application to many other businesses including the Backbarrow Ironworks in today’s Cumbria from 1712 and the Coalbrookdale Company in Shropshire from 1718. The systems of DEB operated by most of the Foley empire investigated by King (2010) appear to have made no use of a journal and, more importantly from the viewpoint of performance assessment, nominal accounts were not maintained. Therefore, they do not capture, within the double entry system, the kind of information about departmental profitability found at the Duke of Norfolk’s Works. However, the double entry ledgers often contained memorandum data relevant to performance assessment and decision making. For example, the accounts of John Wheeler’s Staffordshire Ironworks, from 1689, contained memorandum production accounts for each furnace, forge and so on, which revealed the ‘consumption of materials and the production and disposal of iron from each ironworks, probably derived from less formal records kept by the clerks’ (King 2010: 397). Yields from

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‘the main raw materials’ were also reported; a practice also found in the records kept for the Forest of Dean Ironworks for 1723 and 1724 (King 2010: 397). At the ‘Ironworks in Partnership’ (covering works in Worcestershire, south Staffordshire and the Forest of Dean), the double entry ledger for 1692–93 assembles, separately, the costs and sales of each ironworks to calculate individual figures for profit or loss, for example for the Cookley Forge which shows a loss of £84 8s. 0¼d. King (2010: 400) continues, Each of these accounts takes quantities from the preliminary production memorandum accounts, which are largely concerned with the quantities of each commodity consumed or produced. It then applies prices to them. Transfer prices used were probably the market prices of each commodity. The costs charged included a round-sum contribution (whose basis is not stated) from each towards ‘interest and general charges’, thus distributing these between the works. This provides the profit or loss of each works. Thus the partners were able to work out the profitability of each ironworks and, in King’s estimation, discover that the Forest of Dean furnaces were profitable and that their forges in the Stour valley less so, thereby explaining the decision to sell ‘most of the latter to Richard Wheeler in 1698’ (King 2010: 402). The earliest complete sets of accounts for Philip Foley’s business date from the late 1660s. These include, at the end of each annual set of accounts, a separate statement (see Table 5.6 reproduced from King 2010: 405) which reports for each ironworks: • the amount of iron made; • the number of ‘[cart] loads’ of ‘coles’ (charcoal) and tons of pigs ‘spent’ (used), both in total and to produce each ton of iron (i.e., the yield); • the cost of charcoal per cart load and pig iron per ton and, by applying the yield, the cost of fuel and metal incurred to produce each ton of iron; • ‘common charges’ per ton and interest on capital which are added to produce a total charge per ton; • the difference between total cost per ton and the average sale price is multiplied by the quantity of iron made to reveal the amount ‘gayned’ or lost; • the clerks’ debts, and the stock remaining. Evidence of the use of this material for decision making is provided by King (2010: 404; see also Schafer 1990: 22) when he informs us, ‘Caustic comments are written against the 1674 account of yield (which deals only with quantities), explaining the performance and in several cases blaming

£3125.15.6½ £794.0.6 £3919.16.0½

£4042.2.3½

£3069.15.10 £7111.18.1½

£1240.18.10 £1320.18.10

£80.0.0

119.15.0.0 201.10 1.8.1½ 179.14.0.27 1.10.0.2 £1.4.9 £2.1.8 £5.11.3 £8.7.0 £2.8.10½ £1.0.0 £13.17.6½ £14.19.2 £120.13.1½

£819.3.7 £1178.19.8½

£359.16.1½

122.5.0.16 316.0 2.7.0 174.3.0.2 1.8.1.29½ £1.1.11¼ £2.16.7½ £5.9.8½ £7.16.3 £1.16.5 £0.3.8¾ £12.13.0¼ £15.2.3½ £278.17.5½

Cradley

£1689.3.9 £6447.19.1½

£146.15.11½ £4758.15.4½

62.0.0.10 192.8 3.1.2 86.18.1.24 1.8.0.4½ £1.5.5½ £3.19.0¼ £6.9.10½ £9.2.1½ £4.6.6 £1.19.8 £19.7.3 £16.19.3½

Further forges omitted here

Further forges omitted here

Hales

£181.17.7 £1239.2.6¾

£1657.4.11¾

21s. 6dd £1.3.2 £2.8.3 ironstone £1.1.6 £0.10.8 £0.5.2½ £4.5.7½ £5.14.11¾ £925.6.10

575.16.0.20 1198.2½ 2.1.0

£1555.18.3 £1936.17.9½

£85.9.10½ £380.19.6½

238.19.0.0 726.9½ 3.0.4 744.4.0c 3.1.1¼c £1.0.11¾ £3.3.9½ ironstone £1.2.2 £1.0.9 £0.8.6½ £5.15.3 £5.5.6

Wombridge

The arithmetic of the author (Philip Foley) seems less than perfect at times, perhaps unsurprisingly in view of the complexities of long multiplication and division. Presentation: For reasons of space, it has been necessary to invert the table, so that rows have become columns and vice versa. The information presented has been limited to 5 forges (out of 12) and 2 furnaces (out of 4), also omitting the slitting mills and totals (only given for the gains and subsequent rows). Hales and Wombridge were blast furnaces; the rest finery forges. Notes: a. Tons, cwt. q. lb longweight, i.e., cwt of 120 lb. This is shown by the yield for ‘Asson’ [Little Aston forge]. b. Loads, shems (or sacks), strike (or bushel). A load was a dozen shems, each of 8 bushels. c. Loads (or blooms or dozens), bushels, and pecks. A load was a dozen bushels. d. Price per ton pig iron: at Hales Furnace [Halesowen] and certain others, the mine master was paid according to the amount of pig iron produced. Source: King (2010: 405), taken from Schafer (1990:18).

193.10.2.15 614.4 3.2.1 256.17.3.9 1.6.2.5½ £1.1.11½ £3.9.8½ £6.10.7½ £8.13.5 £3.3.11 £1.18.11½ £16.15.11¾ £17.11.7 £158.11.10½

349.3.0.0 978.9½ 2.9.5 522.10.1.24 1.9.3.23 £1.1.5½ £3.0.1 £5.17.8½ £8.16.9¾ £2.19.10 £1.17.3 £16.13.11¾ £17.13.9 £344.13.7

Philip Foley’s Calculation of the Yield of His Ironworks for 1669 Wilden Whittington Greenes Asson

Iron madea Coles spentb Yield colesb Piggs spenta Yield of pigsa Coles cost per load Comes to Pigs cost per ton with carriage Comes to Common charges per ton Interest stock Totall charge per ton comes to Sold att Gayned Lost Debts per clarks Layd out for wood, etc Stock at works Total Stock

Table 5.6

Pre-Industrial Revolution Cost Calculation 121

122 A History of Management Accounting the workmen’. King also reports a surviving account of the Brewood and Grange Works which sets out the profit in each of nine works annually from 1650 to 1673, leading him to conclude that similar cost statements were prepared for or by Philip’s father from at least 1650. Whereas the above information appears to have been prepared annually by drawing upon data contained in the DEB-based fi nancial accounts, performance was sometimes more regularly ‘monitored by examining the yield from the raw materials of each process’ (King 2010: 404). The value of this information, as a tool for management, was that it could be compared, not only with other works and periods, but also with what was known to be achievable. But King (2010: 404; emphasis added) cautions, ‘it is not possible to say how far costs (or at least the yields from raw materials) were monitored over shorter periods as a routine tool of management’. Interestingly, however, we do know that steps were taken to enhance efficiency by giving the workmen incentives to achieve a good yield (King 2010: 404): Forgemen were usually paid a piecework rate, according to the amount of iron they made. If the hammerman did better, he was paid a bonus for his ‘overplus yield’. He was probably expected [to] produce a ton of bar iron (20 cwt) from a ton of blooms (22 cwt). In the same way, Thomas Cooke the slitter of iron at Wolverley Lower Mill (Worcestershire) was allowed five shillings per ton of iron slit and 14 shillings per cwt. for half the loss (of weight) under 1 cwt per ton, ‘Thomas Cooke not putting any more ends in a bundle of rod than is usual’. (Birmingham City Archives, Z10)

5. Relationship Between Theory and Practice Developments in industrial accounting practice have, in general, preceded developments in theory, if theory is viewed as the literature available on the subject. At the fundamental level, the French-American sociologist Denise Schmandt-Besserat has shown that accounting preceded writing drawing on her study of the ancient tribes of the Middle East from 8000 BC onwards (Mattessich 1994). Nine or so millennia later, Pacioli (1494)—‘the father of modern accounting’—acknowledged the fact that his text on DEB simply described existing practice in the Venetian Republic (Taylor 1956: 180). However, Pacioli, and the authors who followed him, possibly described practices used by only a small minority of more advanced contemporary business organizations. Indeed, the large number of texts, extolling the virtues and describing the features of DEB, published during Tudor and Stuart times, is in sharp contrast to the poor standard of the accounting systems used by some prominent merchants and bankers at that time, and later (Yamey 1962: 25–37). But we may safely assume that there were some fi rms whose records matched the theoretical ideal described in the literature, and even contained refi nements not dealt with there.

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The amount of early literature dealing with industrial cost calculation procedures is scarce, by comparison with that available for the instruction of merchants. Only two works in the English language have been identified as dealing with cost calculation in an industrial setting prior to 1760.30 John Collins (1697) demonstrates the application of double entry techniques to trace the transfer of materials to the process account of a dyer. James Dodson (1750) uses a shoemaker’s accounts to demonstrate the operation of what would today be described as a system of batch costing, namely the costing of individual batches of shoes made up from leather by artisans functioning under the putting-out system. Each of these books deals principally with businesses operating under the domestic system, namely transactions are with ‘outsiders’, and so the accounting principles involved are little different from those associated with a simple trading transaction. Concentration on the domestic system is not, however, particularly surprising in view of the fact that most manufacturing activity was organised in this manner at that time. This chapter has shown that many companies were using, around the time Collins and Dodson wrote their treatises and long before, a wide range of accounting techniques to identify costs incurred in the past and likely to be incurred in the future as the basis for performance assessment and resource allocation decisions. These kinds of calculations appear to have received little or no attention from contemporary writers of accounting texts, perhaps because they were more often made outside the system of DEB which remained the main focus of their attention.

6. CONCLUDING REMARKS In writing this book we are aware of the possible accusation of ‘awarding prizes for the unconscious anticipation of modern management accounting’ (Miller and Napier 1993: 639). This is not our intention but, in writing a general history, it is difficult to avoid commenting on movement from one way of doing things to another. We do not necessarily see this as progress, though sometimes, perhaps often, an improved way of doing accounting did result. Our aim is to better understand how accounting was done and, so far as possible, to explain why it was done by applying, principally, an economic rationalist interpretation of events. We realise that some of the terms we use were not those written or spoken at the time by the people whose actions are reviewed. This might offend genealogists of calculation who believe they ‘put much more emphasis than do traditional approaches on the contemporaneous existence of a particular language or vocabulary, and how this enables particular calculative technologies to be endowed with defi nite meanings and deployed for specific ends’ (Miller and Napier 1993: 639). An intricate focus on the meaning of words is not always feasible given the wide spread in time and space that this book attempts to

124 A History of Management Accounting address. Further, any implication that accounting terms have a universal contemporary meaning today is misguided, though diversity was probably much greater in times gone by.31 As with all historical inquiries, there are endless problems and pitfalls, and the objective must be to tell a reasonably persuasive story based on the available evidence and the theoretical standpoint adopted. Readers are reminded of the need for vigilance. The accounting calculations that have survived in the archives range from the clear and obvious to the convoluted and obscure, and it is the former that researchers and this chapter have tended to focus upon. In pointing to diversity in the complexity of accounting calculations, however, one needs to be mindful of the fact that accounting historians are, sometimes justifiably, criticised on the grounds that they assess past practices by reference to present day standards. The fairer, and more relevant, yardsticks are, ‘What level of expertise was available at the time?’ and, ‘To what extent did methods used enable businessmen to reach appropriate decisions?’ Unfortunately, the information is not yet available to enable these questions to be answered with a high degree of confidence. And quite probably insufficient data has survived to enable entirely reliable conclusions ever to be reached. What is clear from the evidence presented above is that industrialists, operating in far less literate times, went to considerable lengths in the attempt to assemble figures, and make observations, designed to guide them in making choices related to the use of scarce resources. If the information made available proved inadequate for this purpose, it was not for want of trying. While perseverance with these calculations over time might be interpreted as evidence of unthinking path dependency, equally it might reflect a clear conviction of their value, whether perceived or actual. For Bryer, the calculation of the rate of return on capital employed is the accounting signature of fully fledged capitalism. Toms’ review of available evidence of ‘the employment of ROCE calculations shows that most early modern and industrial revolution entrepreneurs did not make use of such calculations’ (Toms 2010: 219). But this does not lead Toms to deny the existence of capitalistic behaviour. For the period prior to full capitalism, Toms (2010: 205) instead introduces the ‘notion of different methods of calculating and analysing profitability as signatures of capitalism at different stages of development’ reflecting evidence of a ‘calculative mentality’. The aristocrat exploiting the industrial potential of his terrain and the ambitious businessman taking on a lease to extract minerals, smelt copper, produce iron or manufacture textiles were certainly not fully-fledged capitalists, in the modern sense, judged by the content of the accounting records. There is little evidence of the ‘signature of the true capitalist’ (Oldroyd 2007: 113), namely relative rates of return being calculated so as to enable the entrepreneur to allocate capital to those activities which promised to be most profitable. However, the pre–Industrial Revolution costing practices presented in this chapter comprise clear signals of the emergence of a ‘calculative’ and perhaps even a capitalist mentality. There is plenty of evidence

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of pre-1760 accounting techniques designed to enable the businessman to plan for the future, choose between alternatives, control costs and enhance profit. There is also proof that some businessmen adopted DEB to facilitate the regular identification of business assets and liabilities and the owner’s capital investment. Much of what has been written on the historical development of cost calculation has focused on what might be described as ‘single variable solutions’. The level of industrialisation, the relative impact of fi xed and variable costs, and the organizational structure of business activity have each been identified as principal causal factors. The conclusion reached here is that such explanations for the development of cost calculation, although intuitively plausible, are incomplete. Cost calculation has developed to serve management in a complex and constantly changing social and economic environment. The variety of cost calculation procedures employed by managers, their often ad hoc nature, and the widely differing circumstances in which innovations occurred, demonstrate the contingent nature of the contemporary accounting framework. In these conditions the manager fi rst decided what he wanted to do—plan, choose or control—and then structured the information accordingly. When the problem changed so did the information required and generated. With the diff usion of ideas and techniques hampered by secrecy and the limited availability of a guiding literature, unstandardised accounting methods were developed by trial and error to meet the specific requirements of individual fi rms. Nevertheless, as we have seen, such practices exhibited recognition of measurement issues that form the cornerstones of modern approaches to cost calculation. These fi ndings add support to the persuasive ‘demand/response’ theory of accounting development, which sees accounting as a ‘social technology’, continually responding to changes in business requirements, while not ignoring the fact that it also serves to shape the environment in which it operates. In this respect, prevailing economic conditions, the nature of business organization and the willingness of management to innovate together combine to determine, to a large extent, the accounting practices that are developed and used. Furthermore, such practices could in turn influence the literature though, as Chapters 6 and 7 further reveal, scope for interaction with the cost calculation literature was inevitably limited prior to the late nineteenth-century ‘costing renaissance’ (Solomons 1952).

Part III

Industrial Revolution to c.1970

6

Industrial Development, c.1760–c.1870

1. INTRODUCTION Cost information had been collected and used to inform decision making in many walks of life long before the advent of the British Industrial Revolution (see Chapters 3–5). Such uses did not register strongly with early historians of accounting such as A.C. Littleton (1933), Ronald Edwards (1937) and S. Paul Garner (1954) who based their assessments on an accounting literature which largely ignored issues of cost calculation. Indeed, the accounting literature published in Britain through to the 1870s paid relatively little attention to industrial accounting. Because Littleton (1933: 360) confi ned attention to published texts he no doubt felt justified in claiming that the advent of ‘Cost accounting represents the influence of the industrial revolution upon double-entry book-keeping’. This book reveals that Littleton possessed an incomplete understanding of the history of cost calculation, but this is unsurprising given that virtually all the empirical studies we are now able to draw upon were undertaken long after he published his pioneering work. Previous chapters have related changes in cost calculation to business development. This being so, it seems highly likely that a period of rapidly rising industrial activity which encompassed the Industrial Revolution and its immediate aftermath would have been accompanied by an increase in, and further development of, cost calculation methods and the use of cost and other accounting information for managerial purposes (see, e.g., Gutierrez, Larrinaga and Núñez 2005). But even when researchers fi rst turned their attention to the study of accounting records surviving from the Industrial Revolution period, their conclusion was that it failed to provide a stimulus for accounting change. An early important examination of business archives was undertaken by the economic historian Sidney Pollard (1965: 248) who concluded that ‘quite advanced and fairly accurate techniques were developed and used’, thereby helping to solve problems such as ‘stock control and prevention of embezzlement, [and] comparisons between departments or commodities produced’. But he also famously declared that ‘the practice of using

130 A History of Management Accounting accounts as direct aids to management was not one of the achievements of the British industrial revolution; in a sense it does not even belong to the later nineteenth century, but to the twentieth’. Pollard’s pessimistic conclusion in part reflected the relatively small number of sets of business accounting records investigated at the time he wrote. It is also possible that Pollard too readily accepted the view of accounting historians from the traditional school, such as Edwards (see below), though he does offer an explanation for what he believed to be a lack of cost calculation activities. Pollard’s rationale was that most fi rms of the time could easily make profits and either did not need advanced accounting systems or would not be damaged unduly by systems that provided incomplete or wrong information.1 Pollard suggests that many fi rms were monopolies, and hence could make ‘easy margins’, thereby explaining their ‘cavalier attitude to exact costing and pricing’ (1965: 245). Indeed, he continues, ‘profit margins were so exceptionally high at the time that any [business] policy would have produced large profits’ (Pollard 1965: 246). Even in ‘the bulk of the cotton industry, and certain sections of the iron industry’, where competition existed, Pollard considered that the need to keep to market prices meant that ‘exact costing by individual fi rms was almost equally unnecessary’ (1965: 246). Similar conclusions had previously been reached by Edwards (1937b: 283) who argued that business opportunities in the engineering trades during the fi rst three-quarters of the nineteenth century were so good that fi rms did not need to pay attention to cost calculation methods. However, like all lengthy periods of economic history, neither the Industrial Revolution period nor the decades which followed up to c.1870 were ones of unbridled growth and prosperity. Economic fluctuations were a regular occurrence, 2 while the extent of competition could vary markedly over time. Indeed, increased competition is typically cited by each generation as a key reason for change in cost calculation practices, and it always seems to be the case that each generation considers competition to be more intense than earlier on. If this logic is applied to the Industrial Revolution period itself, then comparing it with the prior period of proto-industrialisation, it would be a surprise to fi nd no changes in the need for, or nature of, cost calculation practices. Likewise, in the second half of the nineteenth century, further changes might be expected compared to the Industrial Revolution period. Thus, while the writings of contemporary authors of accounting texts and early accounting and economic historians reveal little about developments in cost calculation practices between 1760 and 1870, from a historical perspective it seems unlikely that nothing happened. Indeed, given the rapid technological changes that occurred in this period, and the growth of the staple industries of coal, iron, textiles and shipbuilding (see Section 2 below), it would be surprising if significant developments in cost calculation had not taken place. Pollard himself appears to suspect as much when he states that, by the end of the Industrial Revolution, we can fi nd ‘the

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fi rst stirrings towards the use of accounts in aid of management decisions’ (1965: 247). But was it the case, as Pollard (1965: 248) suggested, that such attempts were ‘embryonic and hesitant’? In the period that has elapsed since Pollard wrote his important work, archival-based research conducted by accounting and business historians has found evidence of much activity in relation to cost calculation throughout the Industrial Revolution period. Pollard’s (1965) cavalier assessment was soon afterwards placed under scrutiny by the work of the economic historian Neil McKendrick (1970), who found that the pottery manufacturer Josiah Wedgwood, on encountering a period of poor results in 1772, undertook a highly detailed cost investigation which made him realise that he could overcome the problem of increasing stocks of unsold products by reducing the mark-up and still make a profit on their sale. Since then there have been numerous studies of individual fi rms, industrial sectors and regions which have revealed more about the nature and extent of accounting activity. These include studies of the Carron iron company in Scotland (Fleischman and Parker 1990, 1991, 1992; Fleischman, Parker and Vamplew 1991; Fleischman and Parker 1997; Bryer 2006b); the Cyfarthfa Ironworks in south Wales from 1791 (Jones 1985; Evans 1990); the iron concerns which eventually became the Staveley company in the 1860s (Edwards and Boyns 1992; Edwards, Boyns and Anderson 1995; Boyns and Edwards 1997b); Boulton & Watt in the decades spanning 1800 (Fleischman, Hoskin and Macve 1995; Bryer 2005); the Charlton Cotton Mills, Manchester, from 1810 (Stone 1973); metal mining and smelting fi rms operating in Wales such as the Mona Mine Company (Jones 1985); various shipbuilders in the Sunderland area (McLean 1995); and fi rms in the coal industry (Fleischman and Oldroyd 2000; Brackenborough, McLean and Oldroyd 2001; Fleischman and Macve 2002). To the story of developments deep within the Industrial Revolution period, archival research has begun to reveal cost calculation activities of fi rms in the middle decades of the nineteenth century. Much of our knowledge of events during this period stems from longitudinal studies of fi rms which continued to use practices developed during or before the Industrial Revolution, most notably in the iron industry (see Edwards and Boyns 1992; Edwards, Boyns and Anderson 1995; Boyns and Edwards 1995, 1996b, 1997a, 1997b) and shipbuilding (McLean 1995). Other studies, which are mainly concerned with the late nineteenth and early twentieth centuries, also contain information relating to practices during the pre-1870 period— see, for example, Boyns (1993) on the coal industry and Boyns, Matthews and Edwards (2004) on the chemical industry. Thus, while cost calculation continued to be carried out by fi rms operating in key sectors of the Industrial Revolution, studies have also revealed cost calculation activities carried out by fi rms in the emerging sectors which were to form the basis of the so-called ‘Second Industrial Revolution’ of the late nineteenth and twentieth centuries (see Chapters 7 and 9).

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The remainder of this chapter is structured as follows. Section 2 examines the economic and business background of the period c.1760–c.1870. Section 3 draws attention to some of the significant accounting issues which arise when managing an industrial concern. Section 4 reviews the development of a relevant accounting literature in the time period covered by this chapter while Section 5 studies the development of cost calculation practices. Section 6 reviews some of the uses made of cost/profit information, and the chapter concludes with an overview of the main elements of accounting change and continuity over the period 1760 –1870.

2. ECONOMIC AND BUSINESS CONTEXT The period from c.1760 through to c.1870 encompasses the Industrial Revolution and its immediate aftermath when Britain was the ‘workshop of the world’. Precise start and end dates for the Industrial Revolution vary between historians with Allen (2009: 2) recently arguing that the Industrial Revolution began c.1750 and ended during ‘the second third of the nineteenth century’, though a more traditional dating would be the period 1760–1830 (Ashton 1948). Ashton (1948), like many other historians since, used the term ‘Industrial Revolution’ to describe a process of social and economic change, but it is a label which has been the subject of much controversy among economic historians during the twentieth century. Although John Clapham and Herbert Heaton, writing in the second quarter of the twentieth century, ‘shunned the term Industrial Revolution altogether’ (Mokyr 1999: 3), most economic historians, in common with accounting historians (Parker 1994), recognise the need for terms and concepts that enable them to conduct their discourses, even if disagreement continues about the precise meaning of those concepts. Ashton (1948: 4) expressed the view that the term was so well accepted that it would be pedantic to offer an alternative, but the question of whether it serves as a meaningful description of dated industrial change continues to be keenly debated (Mokyr 1999: 2). While Deane and Cole (1962) noted a sharp acceleration in economic growth between c.1780 and c.1840, Crafts (1985) has been at the forefront among economic historians arguing that transformation of the industrial landscape was much more gradual than is implied by the term revolution. For Crafts, output failed to triple between 1760 and 1831, whereas for Deane and Cole it more than quadrupled. The gradualist school has, in turn, been challenged by researchers who reassert the veracity of the earlier description, such as Berg and Hudson (1992).3 Whether or not there was a true revolution, or merely a more rapid evolution of the British economy, the decades spanning the late eighteenth and early nineteenth centuries witnessed the combination of a number of technological developments which resulted in the emergence of large-scale manufacturing plants in the textile and iron industries, accompanied by a rapid

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growth in the development of the coal industry. For Wrigley (2010), whose focus is on England, it was coal, a new source of power, which explains the origins of the Industrial Revolution and why it did not end quickly. Various estimates of coal output have been produced for the period prior to 1874 when the government began to collect such data on an annual basis. Buxton (1978: 55) puts coal output in Britain at just under 5m. tons in 1750, 6.2 m. tons in 1770 and 10.1 m. tons by 1800. Church (1986: 3) suggests that average annual output in the years 1830–34 was some three times greater, at 32 m. tons, more than doubling in the next 20 years to 68.4 m. tons in 1850–54, and nearly doubling again to 123.3 m. tons in 1870–74. This eleven-fold increase in output between 1800 and c.1870 made possible the manufacture of the cheap iron that fuelled the growth of the engineering industry which Allen (2009: 273) categorises as a ‘spin-off from the coal industry’. Coal also enabled the development of the railways while the rapid growth of the cotton industry supported the engineering industry through its demand for machinery. In the early stages of the Industrial Revolution it was textiles (cotton, woollen and worsted, linen and silk) which played a significant role in industrial development. According to Deane and Cole (1962: 212), net output of textiles rose from £12 m. c.1770 to £32.9 m. c.1805, £49.6 m. c.1821 and £84.5 m. c.1870. The contribution of the net output of textiles to British national income increased from 9% c.1770 to 14% c.1821, but then fell back to its former level c.1870 as other industries grew more rapidly, although the value of cotton production peaked in 1869–71 at £104.9 m. (Deane and Cole 1962: 187). Production in the iron and steel sector rose from 250,000 tons c.1805 to an annual average of 689,000 tons in 1830–34, but then grew dramatically to 6.4 m. tons per annum in 1870–74 (Deane and Cole 1962: 225). Over the same dates, the estimated value of annual gross output of iron initially fell, from £16.21 m. to £13.78 m. between 1805 and 1830–34, but then rose to an annual average of £113.51 m. in the early 1870s. While the value of tonnage of shipping built and registered in the United Kingdom stagnated between 1795 and 1834 at around an average annual figure of £2 m., by 1865–74 it had risen to £11.6 m. The average annual value of tonnage built in the United Kingdom rose even more rapidly, from £2 m. in 1825–34 to £14.6 m. in 1865–74 (Deane and Cole 1962: 234). The growing importance of industrial activity is reflected in the changing make-up of the economic structure of the country. Table 6.1 shows the impact of the Industrial Revolution on the relative importance of different activities as a source of income for the population based on the 1811 census categories. There, between 1781 and 1831, one can clearly observe the growing importance of industry and commerce and the relative decline in importance of agriculture. The trend away from agriculture towards manufacturing and industry is clearly depicted in Tables 6.2. and 6.3 which indicate, respectively, the structure of the British national product and the

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distribution of the British labour force between 1801 and 1871. Matthews, Feinstein and Odling-Smee (1982: 222–223) have provided a more detailed breakdown of the respective shares of output, labour and capital taken up by different sectors in 1856 and 1873 (see Table 6.4). Tables 6.2–6.4 show that, although agriculture was in relative decline by the early 1870s, it still accounted for around one-seventh of the nation’s labour force and its capital (the latter share being slightly more than that for manufacturing). The largest part of the nation’s capital stock in 1873 still comprised dwellings, Table 6.1 Year

Distribution of Population of England and Wales According to Source of Income, 1781–1831 (in Millions and as a Percentage of Total Population)

Agricultural

Mixed1

Industrial and Commercial Total population

1781 2.33 (30.9%)

2.33 (30.9%)

2.87 (38.1%)

7.54

1801 2.61 (28.5%)

2.79 (30.5%)

3.76 (41.0%)

9.16

1831 3.69 (26.3%)

4.04 (28.8%)

6.32 (45.0%)

14.05

Note: 1Mixed refers to that group whose source of income was predominantly non-agricultural. Source: Deane and Cole (1962: 103).

Table 6.2 Year

The Structure of the British National Product, 1801–71 (Percentages)

Agriculture Forestry & Fishing

Manufactures Mining & Building

Trade, Transport & Income from Abroad

Government, Domestic & Other Services

Housing

1801

32.5

23.4

17.4

21.3

5.3

1831

23.4

34.4

18.4

18.1

6.5

1851

20.3

34.3

20.7

18.4

8.1

1871

14.2

38.1

26.3

13.9

7.6

Note: Row totals do not always sum exactly to 100%, being based in original on other tables where it is noted that totals may not be the sum of individual entries due to rounding. Source: Deane and Cole (1962: 291).

Table 6.3 Year

Estimated Percentage Distribution of Total British Labour Force, 1801–71

Agriculture Forestry & Fishing

Manufactures Mining & Building

Trade, & Transport

Domestic & Personal

Public Professions & All Others

1801

35.9

29.7

11.2

11.5

11.8

1831

24.6

40.8

12.4

12.6

9.5

1851

21.7

42.9

15.8

13.0

6.7

1871

15.1

43.1

19.6

15.3

6.8

Source: Deane and Cole (1962: 142).

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although it was pushed hard by the highly capital intensive transport and communications sector. Commerce accounted for only one-ninth of the nation’s capital in 1873, but employed almost one-quarter of the labour force. In 1873, therefore, the economic structure of Britain, despite major developments in manufacturing, mining and transport, still exhibited some Table 6.4

Sectoral Shares of Output, Labour and Capital in the Whole Economy (Main Sectors), 1850–1913 (All Figures are Percentages) 1856

1873

1913

Agriculture, forestry and fishing Output (constant prices)

18.4

13.5

6.4

Labour

29.6

21.4

11.5

Capital

19.1

15.4

6.2

Mining and quarrying Output (constant prices)

4.6

6.1

6.4

Labour

3.6

4.1

6.5

Capital

1.6

2.2

2.1

Manufacturing Output (constant prices)

22.2

24.6

26.6

Labour

32.5

33.5

32.1

Capital

12.9

14.6

18.5

Transport and communications Output (constant prices)

6.5

7.6

10.5

Labour

4.1

5.6

7.8

Capital

18.5

22.6

23.4

Commerce Output (constant prices)

23.7

25.5

27.2

Labour

20.8

24.7

28.5

Capital

12.4

11.2

9.8

Public and professional Output (constant prices)

8.6

7.9

10.2

Labour

5.3

5.7

8.1

Capital

6.5

6.2

11.1

Dwellings Output (constant prices)

12.5

10.5

7.9

Labour

–

–

–

Capital

26.5

24.3

23.5

Note: Items in columns do not always sum to 100% since table omits figures for ‘Construction’ and ‘Gas, Electricity and Water’. Source: Matthews, Feinstein and Odling-Smee (1982: 222–223).

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traditional features. Table 6.4 shows that the picture was to change more dramatically between 1873 and 1913 (see also introduction to Chapter 7). The inter-related developments of textiles, coal and iron in the late eighteenth and early nineteenth centuries enabled a vast increase in the range of manufactured goods produced as ‘machines spread across the whole of British manufacturing’ during the mid-nineteenth century (Allen 2009: 274). As a result, large numbers of agricultural workers moved off the land to fi nd employment in the factories, mills and mines, thereby creating growing urban conurbations. Thus, whereas in 1760 only 21% of the British population had lived in urban areas, by 1800 this had risen to 33.9% and reached 48.3% in 1840 (Crafts 1994: 45). Such changes could not have occurred without a major increase in the number of businesses, with consequent implications for the role that accounting could play in the management of such concerns. Thus, businesses of all types and sizes began to emerge, some relying on traditional methods of self-fi nancing or through taking in partners, while others adopted the joint-stock format. Although there are no accurate figures for the number of businesses in existence in the early nineteenth century, it seems fair to assume that, as today, sole traders were far and away the main component. Despite their large numbers, being generally of small size, the economic importance of sole traders, both individually and collectively, is today much less than that of larger businesses. The size of businesses in the late eighteenth and early nineteenth centuries, however, was crucially determined by the rules governing the formation of joint-stock companies and partnerships. Jointstock companies could only be formed by Royal Charter or private act of parliament, neither of which could be obtained easily or cheaply. In the main, therefore, economic activities requiring capital in excess of that which a single individual could provide tended to be based around partnerships. While partnerships could be easily formed and dissolved, prior to the repeal in 1825 of the Royal Exchange and London Assurance Corporation Act of 1720 (more commonly known as the ‘Bubble Act’), they were limited to a maximum of six persons, each of whom accepted unlimited liability for the fi rm’s debts.4 Despite the problems associated with such a business form, most particularly the limited access to capital and the need to reform the partnership on each occasion that a partner died or withdrew, in most walks of industrial life the partnership seems to have sufficed. Over time, of course, all businesses could increase their capital through reinvesting profits, but establishing a new business in certain key sectors required large initial amounts of capital. There was a growing need felt in some quarters for the development of a simple and easy way in which to achieve jointstock corporate status. Inland transportation was the fi rst industrial sector in which the requirements for a joint-stock came to the fore. Prior to the Industrial Revolution, shipping had, for many centuries, played a decisive role in the economic

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life of the nation but ships had either been owned by the large chartered trading companies or by merchants and others under the 64ths system.5 Industrialisation after 1760, and especially the rise in importance of coal as a source of power, led to significant changes in the transportation sector. While some coalfields reached down to the coast, many were inland, and those manufacturing activities which began to concentrate around the latter required a means of transporting their products to market, namely an efficient system of inland transport. The growth of turnpike roads initially played a part but a more significant role was played by canals. Beginning about 1760, a number of joint-stock canal enterprises were established as statutory companies, namely by private act of parliament, with the desire to obtain the protection of limited liability also becoming an important motive for incorporation from about this date (Dubois 1971: 96). Together with associated tramroads, these canals dominated inland transport in many areas of Britain until the 1830s or 1840s, when railways began to take over. The heavy investment required to construct canals and railways meant that establishing a joint-stock company through a private act of parliament was the appropriate mechanism, but it could be cumbersome and costly for manufacturing businesses to go down that route. Given the difficulty and cost of securing Royal patronage or parliamentary approval for a new venture, pressure built up for alternative mechanisms. The fi rst change occurred in 1825 with the passing of the Bubble Companies, and so on, Act (6 George 4, c.91) which allowed a maximum of twenty partners. For some businesses, especially in the iron industry where heavy capital investment was increasingly required, even these new arrangements proved insufficient. Innovative members of the legal profession, perceiving the existence of a gap between the requirements of increasingly capital-intensive activities and company legislation, came up with the idea of the Deed of Settlement Company which was something of a halfway house between the joint-stock company and the partnership. Of dubious legality, though its status never appears to have been challenged in the courts, it was used by some businesses, for example the Rhymney Iron Company in 1836, prior to the creation of a simple and cheap method of registering joint-stock companies through the Joint Stock Companies Act 1844 (7&8 Victoria, c.110). In 1855 the Limited Liability Act (18&19 Victoria, c.133) gave company promoters the additional option of registering with limited liability and these two acts were consolidated in the 1862 Companies Act (25&26 Victoria, c.89). The prevailing Companies Act remains the basis for registering new companies, large and small, up to the present day. Hunt (1936: 76) notes that just 300 companies were floated in Britain between 1834 and 1836 whereas, in the period between November 1844 and July 1856, 3,942 businesses were provisionally registered (Shannon 1932: 397). However, of these, only 956 companies completed the second stage of the process to achieve formal registration. Between 1856 and 1865

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A History of Management Accounting

6,161 further companies were fully registered with limited liability (Shannon 1932: 421). The early company legislation therefore had an impact on the formation of new companies but, perhaps more significantly from the accounting point of view, the change did not lead to any immediate major increase in the use of external fi nancial markets to raise funds. Many of the businesses which registered as joint-stock companies were small, familyrun concerns keen to acquire the protection of limited liability. While some companies began to raise significant amounts of capital in the 1860s, utilisation of the new structure to raise capital on a large scale is principally a story of specific periods post-1870 (Cottrell 1979: 179). The changes that were wrought in the structure of the British economy between c.1760 and c.1870, in the capital needs of industry and in the nature of business forms in existence, might have been expected to generate a significant literature dealing with the problems of accounting for managerial purposes in profit-seeking businesses. Section 4 reveals that this was far from the case. First, however, it is necessary to consider, in general terms, some of the significant accounting issues which arise when managing an industrial concern.

3. DISTINCTIVE ACCOUNTING REQUIREMENTS OF INDUSTRIAL CONCERNS The onset of industrialisation generated a somewhat different set of accounting issues for industrialists from those which faced other business groups, among which the merchant class was most prominent. We will see that many of the issues discussed below had previously been addressed by some person or business (Chapter 5), but we will also discover that their importance became felt far more widely during the Industrial Revolution. Miller and Napier (1993: 644) have pointed out that ‘there are different modes of economic calculation deployed according to particular objectives or ideals’, and it seems likely that during the Industrial Revolution period the growth of industry resulted in many different approaches to cost calculation, reflecting the varying circumstances of the emerging businesses, the industrial sector in which they were located, and the needs of those running them. Toms (2010: 206) has suggested that modes of calculation depend not only on the forces of production (the economic base) but also the socialisation of capital (the social superstructure), together with the process of their interaction. Focusing on the economic base, it is clear that cost calculation issues varied between key business sectors of the Industrial Revolution, most notably between the primary, or raw material sector (e.g., coal), and the secondary, or manufacturing sector (e.g., iron, textiles, shipbuilding). The production of coal, although a process, does not involve transformation of the basic product through a series of different stages, and so cost calculation focused

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on the average cost of producing a ton of coal, namely the combined unit cost of cutting, hauling to the surface, and sorting the coal to make it available for transportation to the customer. The generation of profits in the coal industry required keeping the combined cost of production and of shipment to the customer together with business overheads below market price. The operation of a colliery can also involve working several seams and/or a number of different faces within the same seam. Cost calculations, therefore, might potentially be needed for each face and each seam as well as the colliery as a whole. Whichever the case, the cost calculation issues were relatively simple: the need to record the cost of different types of labour, materials and all other expenses (overheads) associated with the running of the colliery. The cost per ton of coal could then be found by simply dividing the total cost by the number of tons produced. For a colliery owner or manager wishing to monitor and, hopefully control, production costs, cost per ton would provide an indication of the overall efficiency of the mining operations, and examination of such figures over time, namely comparing cost from period to period, would provide further potentially useful managerial information.6 Firms operating in the secondary sector of the economy, however, faced additional accounting issues since their activities involved the conversion of raw materials into a finished manufactured good or, indeed, a range of goods. For example, an iron maker might convert iron ore, which has been mined, into pig iron in a furnace (Process 1) then into wrought iron at the forge (Process 2) and then to rod iron in a mill (Process 3), finally being cut up to produce the nails (Process 4) required to, for example, build ships. The iron maker, like the coal producer, could collect together total costs which may be used to help determine prices charged to customers and to enable the firm to tender for new work. The overall profit or loss might also be computed to help decide whether to continue in business. But given the overall nature of the nail making activity, which comprises a series of processes, the iron master might well wish to discover the profit or loss from each segment because there is the option to sell, for example, the rod iron rather than to slit it into nails, or the possibility of sub-contracting one or more of the processes to someone else. It was discovered that accounting could help such decision making, but that it required new accounting techniques to be developed. To enable profits or losses by activity to be measured, it was necessary to confront the issue of apportioning costs to different processes (where overheads raise particular difficulties) and the need to value partly finished goods transferred from one process to another. That is, accounting procedures were needed to enable each activity to be treated as a centre where costs could be collected and profit could be measured. A key issue here is the price at which semi-fi nished products are transferred between cost centres. Possible options include setting the transfer price of semi-fi nished products at the amount which they would exchange for in the market, an accounting price determined by management, or cost

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A History of Management Accounting

price, in which case all cost centres other than that where the fi nal product is produced make neither a profit nor a loss. The choice of transfer price depends on the purpose the calculations emanating from it are intended to serve (see Emmanuel and Mehafdi 1994; Boyns, Edwards and Emmanuel 1999). If transfers are effected at cost price then this enables cost-based measures of operating performance, relevant data for the identification of waste, and the ability to assess the effect of technological or organizational innovations. Cost-based transfers also avoid the inclusion, in stock, of unrealised profits that might be seen to affect the comparability of cost calculations over time. The use of market or accounting prices, on the other hand, enable identification of the relative profitability of different products and processes for performance measurement purposes (e.g., the achievements of departmental managers) or decision-making purposes (e.g., to decide which parts of a business to expand or contract). In addition to issues of cost apportionment and transfer pricing, for companies in both the primary and secondary sectors there was also the growing problem of accounting for capital expenditure as business activity became increasingly capital intensive due to technical innovation (e.g., the application of the Bessemer process of steel making). Finally, the businessmen needed to decide whether calculations should include the opportunity cost associated with the business engaged in its current activity or, to put it another away, an allowance for the fact that the capital invested in the business could have been used elsewhere. Given the important accounting issues which arise in relation to industrial concerns, to what extent, if at all, were they discussed in the accounting literature between c.1760 and c.1870? This is now considered.

4. THE DEVELOPMENT OF THE ACCOUNTING LITERATURE In their seminal writings, Edwards (1937a, 1937b) and Solomons (1952a) identified only eight significant contributions to the cost/industrial accounting literature prior to a period which began c.1870 and which Solomons’ captioned the ‘costing renaissance’. Two of these works were published before 1760, John Collins (1697) and James Dodson (1750) (see Chapter 5), and six thereafter: Wardhaugh Thompson (1777), Robert Hamilton (1777–9), Frederic William Cronhelm (1818), George Jackson (1836), Joseph Sawyer (1852) and Frederick Charles Krepp (1858).7 Other works dealing with cost calculation that we have identified include: William Gordon (1766), William Wood (c.1777), Philip Comins (1814), Thomas Smith (1840), Alexander Gordon Henderson (1841), Henry Tuck (1856) and Sir Robert George Crookshank Hamilton and John Ball (1869).8 Much of the accounting literature published between c.1760 and c.1870 echoed that of earlier times: treatises focused on explanations of the technique of DEB, especially in regard to the accounts of a merchant

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141

(see Chapter 4). There were nods in the direction of accounts suitable for a manufacturer which addressed some of the issues raised in the previous section, but descriptions of such systems were few and far between. Gordon (1766: 260 –267) makes a limited attempt to bridge the gap between merchant accounts and manufacturing by devoting eight pages to a description of operations under the putting-out system, with transactions recorded on a double entry basis in both monetary and physical quantities. Thompson (1777) provides an early description of process costing, using the example of the manufacture of ‘thread-hosiery’ through the putting-out system, but his focus was therefore confi ned to external transactions. Around the same time Wood (c.1777) devoted a 16-page chapter to a manufacturer’s accounts, indicating the sort of books that would need to be kept, but he remained silent on the practical operation of the system described. Of greater significance was the two-volume work of Robert Hamilton (1777 (vol. 1) and 1779 (vol. 2)). In the context of a linen manufactory, Hamilton dealt with flow production and process costs, transfer pricing (favouring market price), joint costs and decision making, rate of return calculations, residual income and interest as an opportunity cost (Mepham 1988a, 1988b).9 Given the contemporary relevance of these issues it is somewhat surprising to fi nd that this material was omitted from the second edition published in 1788. The decision to publish a much shorter volume may explain the removal of material which might have been considered ahead of its time. A further speculation is that Hamilton decided that he might obtain a better return on his ideas by removing the material from public view and restricting its dissemination to other mechanisms, such as providing classes in cost calculation which might fetch a premium. Despite the insights contained in the above texts, not one was exclusively concerned with industrial accounting. Yamey (1991) suggests that the fi rst such book was Kneppel’s Oylslagers Handboek, published in Amsterdam c.1789, and it certainly seems to be the case that before 1870 little attempt was made to try to emulate that work in Britain. Even in those works whose titles suggested they dealt with the needs of manufacturers, a closer examination reveals a focus on ‘general principles’, especially in respect to DEB, merely suggesting that once the techniques have been mastered they can be applied to a wide range of business activities. In practice, however, the numerical examples provided in these texts are nearly always based on the activities of merchants, retailers or wholesalers, thereby avoiding the problem of accounting for internal transfers. For example, Charles Babbage (1832: 203), Lucasian Professor of Mathematics at the University of Cambridge from 1828 to 1839, considered that it is of great importance to know the precise expense of every process . . . [because] One of the fi rst advantages which suggests itself as likely to arise from a correct analysis of the expense of the several processes

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A History of Management Accounting or any manufacture, is the indication which it would furnish of the course in which improvement should be directed.

Babbage, however, failed to provide much guidance as to how such knowledge might be gained. A few years later, echoing the earlier works of Comins (1814) and Cronhelm (1818), Jackson (1836) emphasised the need to open a manufacturing account to record resources consumed, including transfers of raw materials from the stock account. Smith (1840) discussed a ‘DR and CR Manufacture Account’ in which all expenses (material, wages and other expenses) were debited and sales credited, the difference being profit. Smith noted that if the manufacturer was also a merchant, then he would want to keep separate accounts for the manufactory and the mercantile warehouse so that he would be able to know the profit from each activity. A concern with how to accommodate the needs of the manufacturer within the traditional DEB system increasingly featured in the literature of this period. Thus, Henderson (1841: 105) emphasised that, contrary to the beliefs of many, double entry was appropriate for recording the affairs of manufacturing and retailing businesses. Krepp (1858: 151) repeated the view of many earlier writers when stating that ‘The MANUFACTURERS’ SYSTEM, in its main features, is identical to that drawn up for Tradesmen, except for more extensive manufacturers, who probably fi nd it to their advantage to follow the MERCHANTS’ SYSTEM’. Krepp did, however, suggest that the books of raw materials and fi nished goods would need to be kept in terms of both quantities and values, implying the need to record internal transfers so as to determine the amounts debited to the fi nished goods account, but their purpose is not elaborated upon. A decade later, Hamilton and Ball (1869) justified their focus on external rather than internal accounting issues by reiterating that ‘commercial accounts’ are not really different from merchant accounts. As the accounting literature developed in the nineteenth century, it was recognised that an ever-increasing number of accounting books might need to be kept for specific purposes. While some of these would form components of the DEB system, others were intended to be supplemental. Thus, Robert Yallowley Barnes (1872),10 in the context of a cloth manufacturer, referred to two books which could usefully be employed but which were outside the DEB system: the ‘Cost Prices Book’ and the ‘Factory Books’. It seems that the purpose of the latter was to record the physical amount of cloth manufactured, with it specifically stated that the Cost Prices Book should contain ‘an alphabetical or arranged list, of all the articles which the fi rm may require to purchase, with a note of the various prices at which they have been or can be obtained’ (Barnes 1872: 37). To the limited extent that they featured in the available literature of the period, three issues in cost calculation which have given rise to ongoing debates spanning centuries are now examined: depreciation, interest on capital/return on investment, and transfer pricing/departmental profits.11

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4.1. Depreciation The issue of depreciation was discussed in an agricultural context at the very end of the eighteenth century by the writer and traveller Arthur Young (1797) who recommended the inclusion of a charge for ‘wear and tear expenses’. Young argued that farmers wishing to have ‘an accurate record of all farm costs’ should include a charge for ‘wear and tear’ expenses (e.g., harnesses, blacksmith, wheelwright, etc.), and that these should be divided properly across the produce of a farm through the application of differential absorption rates: ‘the arable lands will absorb the greatest part of these expenses—mowing grass very little—and feeding grounds, still less’ (Young 1797: 55, quoted in Juchau 2002: 376).Thirty-five years later, in a manufacturing context, Babbage (1832: 203) stressed the need to know ‘the wear and tear of machinery’. By the mid-nineteenth century, recognition of the need to include depreciation as an expense had become more commonplace. The civil engineer Charles Vignoles (1850), and the accountant Joseph Sawyer (1852), both make reference to the matter. Vignoles includes a charge for depreciation on plant used to manufacture coke from turf, while Sawyer does so in relation to the operation of a tannery. Vignoles (1850: 24) indicates that the ‘Cost of the Coking Establishment’, namely the operating costs, should include ‘repairs and depreciation’ with ‘Repairs and Renewals (or Depreciation)’ on £3,000 of machinery and engines charged at 20% and on the remaining capital equipment (£2,000) at 10%, giving an overall rate of 16% ‘on fi rst outlay of £5,000’. Sawyer (1852: 200) indicates that ‘a certain sum be annually deducted for depreciation’ from ‘Horses and Wagons, Utensils, Bark Mill, Fixtures, and anything of the like character’.

4.2. Imputed Interest/Return on Investment From time to time, the issue of whether or not imputed interest and, indeed, interest on borrowed monies, should be included in cost calculations was raised and discussed. In his ground-breaking work, Hamilton (1777–79) indicated the need to account for imputed interest as a business cost and also to produce a figure for residual income with a purpose analogous to the twentieth-century concept of return on investment (ROI): the merchant’s gain should only be estimated by the excess of his gross profits above the interest of his stock . . . [further observing that] if the profit of his trade be less than his stock would have yielded at common interest, he may properly account it a losing one (quoted in Mepham 1988a: 64; see also 1998b: 346–352).12 For a coking establishment requiring a capital investment of £5,000, Vignoles (1850: 27–28) recommended that ‘a provision must be made (beyond

144 A History of Management Accounting the 16% for repairs and depreciation already provided for) to cover interest or sinking fund; and this becomes fairly chargeable on the cost of making the Turf-coke before considering profits’. In his calculation, Vignoles assumed an annual interest charge of 5%. Also in the middle of the nineteenth century the Irishman, Dionysius Lardner (1850: 307), sometime professor of mathematics at University College, London, in the context of railways, referred to comparing receipts and profits with the ‘capital absorbed by the establishment and stock’.

4.3. Transfer Pricing and Departmental Profits Thompson (1777), like Dodson (1750) before him, dealt with the transfer of goods by merchants to households under the domestic system, with such transfers made at cost. It was Hamilton (1777–79) who was distinctive in proposing that transfers within a linen manufactory should be made at market price so as to reveal ‘the gain or loss by dressing flax’, ‘the gain or loss by spinning’ and to enable ‘a comparison of the profit obtained by selling the linen, white or brown’ (quoted in Mepham 1988a: 60). Twenty years later, Young (1797) recommended the application of a similar procedure to agricultural activities (Juchau 2002: 377). In the second decade of the nineteenth century, both Comins (1814) and Cronhelm (1818) addressed the issue of internal transfers. Comins made several references to manufacturing activities and devoted 41 pages to examining the transactions of a business at various stages in its development through a year, utilising transfer prices in deriving the profit from the various aspects of the business (see Boyns, Edwards and Nikitin 1997: 77–80). Cronhelm illustrated internal transfers within the activities of a woollen cloth manufacturer but only in terms of physical quantities (see Edwards 1937b: 254). Sawyer (1852) discussed the appropriate method for determining the cost of transfers of hides in the process of tanning.

4.4. Overview Edwards (1937b: 255) concluded that, while ‘the late-eighteenth century had produced an accounting technique adequate to deal with industry built up on the domestic [i.e., putting-out] system . . . the Industrial Revolution . . . [failed to bring] in its train an accounting service aimed at resolving the “fi xed cost problem”’. Certainly the accounting literature published between c.1760 and c.1870 which discussed cost calculation issues in manufacturing concerns was sparse. Furthermore, where such issues were discussed, the examples used were largely linked to the textile industries of linen, silk and wool rather than to the major industries of the Industrial Revolution and mid-nineteenth century—coal, iron and cotton textiles— although Lardner (1850) did refer to cost calculation on the railways. This lacuna may have arisen because authors, many of whom were educators

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based in trading or fi nancial centres such as London and Edinburgh, had little or no real knowledge of these major industries.13 At the same time, those who did have knowledge of the techniques and practices used, the industrialists and businessmen themselves, were perhaps too busy to write relevant texts, or were concerned that others should not know the techniques which they used to control their businesses. The desire for secrecy in such matters seems not to provide an entirely persuasive explanation, however, given the willingness of businessmen to share technical and other information at this time. While the dearth of British texts on industrial accounting is incontrovertible, interpreting the significance of this fi nding is not a straightforward matter. Accounting historians from the traditional school concluded that, because cost calculation received little mention in the literature, little of it was being carried out, or that the calculations used to generate costs were of a simplistic nature. In reviewing the technical literature relating to mining and metals in the eighteenth century, Harris (1992) argued that there was no simple link between literature and practice: while the French literature on mining coal was more extensive than that in Britain, the British coal industry was far more advanced. Boyns, Edwards and Nikitin (1997: 197–198) suggest that the same argument applies in relation to industrial accounting in the two countries in the early nineteenth century. In France, accounting works by Payen (1817), de Cazaux (1824), Godard-Desmarest (1827) and Simon (1830) discussed important issues such as depreciation, overhead apportionment and transfer prices as a means of helping to determine the source of profit (see Boyns, Edwards and Nikitin 1997: 83–112; Edwards 1937b; Solomons 1952a). While the lack of equivalent British texts is prima facie surprising, given the development of the British economy in the late eighteenth and nineteenth centuries and its overwhelming importance in the world economy at the time, it may simply reflect, as in coal mining, a greater familiarity with the relevant accounting technology and less need for a significant literature on the topic. However, it should be pointed out that authors such as Walker (1875: preface), writing just after the end-date of this chapter, believed that their work was fulfilling a pressing need.14 As will be shown in the next section, archival-based research conducted over the past 20 years or so has, indeed, found substantial documentary evidence to indicate widespread calculation and use of cost information for managerial purposes between c.1760 and c.1870, building on what was found for the proto-industrialisation era (Chapter 5). In the next section these practices and the uses made of cost information are examined.

5. COST CALCULATION PRACTICE, C.1760–C.1870 Cost information can be used for a number of managerial purposes, with Fleischman and Parker (1991: 364) emphasising its employment during the

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Industrial Revolution period for ‘Cost Control (Responsibility Management)’, ‘Overhead Accounting (Product Costing)’, ‘Decision Making (Routine and Special)’, and ‘Standard Costing (Budgets, Forecasts, Inventory Control)’. The requirements of management can influence the nature of the cost information collected and the manner in which it is generated, with the latter also affecting its usefulness for managerial purposes. Cost data can be estimated or actual, and it can be generated on an ad hoc basis or in a routine manner through an accounting system.15 The nature of such systems could vary greatly, not just between fi rms in different industrial sectors, but also between fi rms within the same sector and, indeed, at the same fi rm over time. Variations can reflect the use made of the cost information, which may also differ from business to business and from one time period to another. Nevertheless, once introduced, for good or ill, systems of cost calculation could exhibit significant elements of continuity, even though they might also display important signs of change. In the remainder of this section, attention is focused on a range of issues surrounding the ongoing development of cost calculation practices: estimates vs. actual costs; the trend towards systematic cost calculation based on DEB; and the key accounting issues arising from the creation of cost/ profit centres.

5.1. Estimates vs. Actual Costs For Pollard (1965: 219), during the Industrial Revolution ‘cost estimates represented the highest forms of accounting of which records have survived’. Indeed, he claimed that if ‘one confi ned oneself to cost estimates, and ignored the actual post factum accounts, much of the cost accounting of this period would appear extremely advanced’ (Pollard 1965: 220). Ex ante estimates of cost can be prepared for two reasons: (1) as a basis for determining prices to be quoted with the aim of securing orders, and (2) as part of an attempt to control costs through generating an estimate of what something should cost for subsequent comparison with actual costs. In the latter case, ex ante estimates were used to judge whether or not production had been carried out efficiently. The conceptual basis for this comparison later manifested itself in the system of standard costing that played a prominent role in evaluating twentieth-century business efficiency. This topic will be discussed more fully in subsequent chapters (especially Chapter 9), but it is important to note that physical and cost standards did feature in management practices well before 1870. Concerning the use of standards, Scorgie (1997: 32) has suggested that the ‘Management accounting techniques used by Industrial Revolution managers were adaptations of mensurations used in earlier epochs’ and, indeed, we have noted the use of standard yields on medieval estates and ore trials conducted at metal smelting works in the seventeenth century (see Chapters 3 and 5 respectively). Reverberations of the latter are found

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during the Industrial Revolution in calculations such as those carried out by John Vivian for the Mona Mine Company in 1811 and 1813 to measure the impact of different qualities of copper ore on yields and production costs (Jones 1985: 191, 204). A similar exercise was carried out in 1848 at Vivian & Sons’ Hafod works, designed to ascertain the efficiency of coal consumption. Coal was the major variable cost element in the copper smelting industry, and Vivian arranged ‘trials’ designed to ascertain the quantity that should be used in each operation. They showed that 59,286 tons of coal were required, whereas 69,525 tons of coal had been used, indicating that fuel costs were over 17% higher ‘owing to bad work’ (quoted in Edwards and Newell 1991: 48). Fleischman and Parker (1991) found plentiful evidence of the use of production and costing standards among 20 of the 25 companies whose archives they surveyed.16 At Carron they concluded that ‘Price and quality standards of inputs and outputs were an integral part’ of the company’s management decision processes (Fleischman and Parker 1990: 218). The archives of the tape manufacturer, Philips, revealed ‘a detailed set of production standards for 1771 that shows monthly input quantities projected over a 20-month period to achieve a desired level of output’ (Fleischman and Parker 1991: 367). Standards were also established for raw material waste and to provide a yardstick for assessing departmental results (Fleischman and Parker 1991: 363–364, 368). Possibly the best-known early example of scientifically constructed labour and material standards in Britain comes from the Boulton & Watt archive. Labour standards, involving time studies and the creation of piece rates, were described as the output from ‘an incredible outburst of calculating activity in the 1800–1802 period’ (Fleischman, Hoskin and Macve 1995: 167). Estimates and standards were also used for purposes of planning and coordinating future activity, with Spraakman and Wilkie (2000; see Chapter 4 above) describing their early use at the Hudson’s Bay Company in the seventeenth century and Thomas Lovatt explaining their role in budgetary control on an estate in a treatise penned in the 1760s (Jones 1985; see Chapter 3 above). During the Industrial Revolution, Carron prepared a budget in 1762, and a request was made from managers at the company’s Quarole colliery, in 1763, for a 13-year projection of income (Fleischman and Parker 1990: 218). There is much evidence of the forward planning of large-scale capital expenditure late in the period covered by this chapter at Bolckow Vaughan where, in 1866, the directors were provided with details of estimated future outlays on the collieries and coke ovens (BV Directors’ Minutes, 20 June 1866: 261). Moving outside the iron industry, Lardner (1850: 219) noted that the analysis of past expenses of railways could be used as a guide for estimating future expenses. In addition to the preparation of ex ante estimates of costs and future returns, estimated figures were used in compiling ex post accounts, especially where information was needed quickly and to get out figures of

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actual costs would take too long, thereby reducing the usefulness of the data for managerial purposes. Details of actual prime costs, namely direct labour and material, can usually be obtained very soon after the end of an accounting period since regular, up-to-date records are kept, but other items of expense, especially indirect expenses, may not be known, even today, with any degree of accuracy for several weeks or even months after the end of the accounting period. In such circumstances, many manufacturers who adopt a systematic approach to cost calculation make do with ex post cost figures that contain estimated values.

5.2. The Trend Towards Systematic Cost Calculation Based on DEB Cost calculations can be derived from either accounting or non-accounting sources, though it is more typically the case that routine cost figures would be the product of some systematic (accounting) approach while ad hoc calculations may have more diverse origins (see Chapter 5). A famous example of ad hoc calculations already noted is that conducted by Wedgwood in 1772. In the view of McKendrick (1970: 47), Wedgwood’s calculations indicated ‘the level of sophistication of his business methods and of his knowledge of accountancy’. McKendrick (1970: 64) also points out that although cost calculation ‘was [subsequently] sheathed . . . [it was] not allowed to atrophy’, becoming an important weapon in Wedgwood’s managerial armoury. While it is certain that Wedgwood continued to use cost information when making management decisions after 1772, it is much less clear whether he conducted cost calculations on a systematic or an ad hoc basis. While it may be the case that, for Wedgwood’s own business, the 1772 cost calculation exercise represented an example of ‘putting accounting where accounting was not’ (Hopwood 1987: 214), other contemporary examples reveal that the use of accounting information for managerial purposes was not a new phenomenon (see Chapters 3–5). While ad hoc cost calculations could provide important information for businessmen at a particular point in time, such individuals would then have to decide whether to collect such information on a systematic basis, namely whether or not the costs of so doing outweighed the benefits. If it was decided to make regular cost calculations, the question of how this should be done then arose, namely whether it should form part of the formal accounting system, increasingly based on DEB, or be separate therefrom. Over the centuries there have been, of course, many different systems of bookkeeping used for the purpose of keeping a continuous record of rights and obligations. These include CDA, other systems of single entry bookkeeping (which might involve the use of memorandum books of entry and ledger accounts to record some of the entity’s transactions) and DEB systems. All were capable of generating cost information, and continuing archival research has revealed use of accounting systems for this purpose to be far greater than believed by earlier historians.

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The transition from CDA to DEB was an event which spanned several centuries (see Chapters 3–5). Thus it is no surprise to fi nd plentiful examples of hybrid schemes of bookkeeping in use.17 For example, the system employed on the Mackworth Estate (Gnoll, Neath) in 1759–60 was designed to enable the preparation of traditional charge and discharge statements of accountability, but also involved the maintenance of a ledger kept on double entry principles. Furthermore, it was organised in such a way as to help identify the income, costs and profits of separate operations (Jones 1985: 56). Thus, a profit and loss account for the Gnoll property for the year ending 13 December 1760 matches profits arising from a range of activities—including coal, wheat, barley, brick making—with overhead costs such as maintenance of the gardens, household expenses, servants’ wages and general charges. This activity-based method of profit calculation and fi nancial reporting, used in earlier times by merchants (see Chapter 4), persisted when industrial enterprises moved over to a fully fledged system of DEB, such as that prepared for the Cyfarthfa Ironworks for 1814. McLean (1995: 121) describes a comparable method of presentation in use at the shipbuilders Tanner and Beckwith around this time. The rate at which DEB methods were diff used amongst British businesses remains unknown, with some large companies continuing to use single entry systems into the late nineteenth or early twentieth centuries (Jones 1981: 23). While Fleischman and Parker (1991: 371) considered that ‘managerial and fi nancial accounting systems’ developed individually in early British industrial concerns, there are examples of fi rms operating DEB systems which enabled the generation of both cost and fi nancial accounting information prior to the Industrial Revolution (Edwards and Boyns 1992; King 2010). Further examples, prior to the end of the eighteenth century, include the Carron Company in Scotland by 1766 (Bryer 2006b: 703–705) and the Cyfarthfa Ironworks in South Wales by 1791 (Jones 1985; Evans 1990). Also in the iron industry, cost and fi nancial information based on a system of DEB continued to be generated on a regular basis in the 1780s at the Staveley concern; an arrangement which became increasingly common practice among large iron, coal and steel companies during the nineteenth century (Boyns and Edwards 1997b). Jones (1985: 141) also suggests that the Mona Mine Company was using a DEB system by at least 1817, while the Charlton Cotton Mills, Manchester, did so from 1810 (Stone 1973). In the shipbuilding industry, the Sunderland-based fi rms Tanner and Beckwith (1819–25) and Laings (from 1818) also used DEB systems which generated cost data (McLean 1995). At the beginning of the 1840s the bookkeeper, Henderson (1841: 105), opined that ‘Many extensive manufacturers keep their books on double-entry, though it is by no means so general as it might be’. It seems likely, however, that the use of such systems increased through the middle decades of the nineteenth century, as fi rms previously using them continued to do so, while other fi rms favoured their adoption either instead of existing systems

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or from their dates of formation. Newly formed joint-stock companies such as the iron and steel makers Consett (1864) and Bolckow Vaughan (1865) employed, from the outset, accounting systems capable of generating both cost and fi nancial information, while in the engineering sector the agricultural machinery makers, Ransomes of Ipswich, from c.1856, developed a DEB system capable of producing fi nancial and cost information (Reading, TR RAN AC5/6 and AD3/11). Writing in the late nineteenth century, the chartered accountant Thomas Plumpton made several references to the ‘Italian [DEB] system’ in which ‘the Cost Accounts were so interwoven with the Commercial Accounts as to form an integral part of the whole’. Plumpton (1890: 17) noted that, earlier in his career, he had experienced this system when keeping the accounts of a large engineering fi rm in the North, which employed c.1,000 workers and manufactured ‘locomotives and marine engines, boilers, and every kind of machinery’ (1892a: 269–270).18 The utilisation by some companies of DEB systems which enabled the generation of cost information may well have resulted from the engagement of professional accountants to install their accounting systems. Thus, in 1864, Edwin Waterhouse undertook ‘a heavy piece of work in planning a system of cost accounts’ for the Leeds machinery manufacturer, John Fowler (Jones 1988: 79) while, as auditor of the London and North Western Railway, he worked with the company’s accountancy department to facilitate ‘the compilation of operating statistics which were used, in turn, to assess performance and the allocation of resources’ (Jones 1995: 53). At Bolckow Vaughan the company’s auditors Chadwick, Adamson & Co. were called upon in the years immediately following the company’s formation in 1865 to advise on the implementation of an accounting system capable of generating cost information. It seems clear, therefore, that some of the cost calculations conducted by businesses operating during the Industrial Revolution and following decades were one-off exercises but, increasingly, cost information was generated on a more regular and systematic basis. However, through till 1870 in some industries and probably many companies, cost information was prepared, if at all, only on an annual or half-yearly basis.19 At the Staveley iron works, where the accounts had been prepared on an annual basis since the mid-eighteenth century, the introduction of a new system in 1856 meant that the cost accounts for the collieries were now drawn up on a halfyearly basis (see Edwards, Boyns and Anderson 1995: 18–21). At Consett, detailed cost analyses were also conducted on a half-yearly basis from the 1860s, while in the late 1860s/early 1870s the Old Castle Iron & Tinplate Co. Ltd. prepared annual, half-yearly and quarterly ‘manufacturing costs’ (Swansea, Old Castle C38–39). At some businesses it is known that cost information was prepared much more frequently in earlier times. Thus, the blast furnace supervisor at Carron supplied monthly reports of cost per ton for iron from each blast furnace in the 1790s (Fleischman and Parker 1991: 365). At the Charlton

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Mills, the gain or loss from 13 cost centres, together with the profit or loss of the warehouse, were calculated on a bi-monthly basis from 1810 (Stone 1973: 71, 77). Later in the nineteenth century, between 1847 and 1852, we fi nd the Dowlais Iron Company producing four- or five-weekly cost sheets that provided data under each of the following headings: coal, mine (ironstone), limestone, pig iron, cokes, fi ners’ metal, puddled bars, bar iron, blast engines and forge engines (Boyns and Edwards 1997a: 46). The agricultural machinery manufacturer Nalder and Nalder Ltd. produced monthly figures by the 1870s (Reading, TR NAL 334), while coal industry cost sheets were usually drawn up on the basis of the period for which miners were paid (wages accounting for something like 70% of total working costs in the coal industry in the late nineteenth century (Church 1986: 502)). At the Powell Duffryn company in south Wales, for example, in the late 1860s periodic cost information relating to each of the company’s collieries was entered into large leather bound volumes, one for each year, on a monthly basis in line with the recommendation of the chartered accountant, F.H. Carter (1874). By 1871, however, the cost information was prepared fortnightly (Boyns 1993: 336) reflecting the pay period for miners, and remained so until nationalisation of the coal industry in 1947. Fortnightly ‘statements of costs’ were also the norm at Nostell colliery, near Leeds, from December 1869 (Leeds, NC 5/8). While historians have unearthed evidence of cost information in use in the major industries connected with the Industrial Revolution and its aftermath, much less is known about one sector which was to feature significantly in developments during the second half of the nineteenth century: the railways. 20 Although railways were prominent in fi nancial reporting developments, and despite the legislative requirements placed upon companies including the submission of annual Railway Returns from 1841–42 and accounting conforming to a standard format from 1868¸ cost calculation activities appear to have been somewhat limited. The squeezing of profit margins from the mid-1840s, however, resulted in changes at the LNWR where the general manager from 1846 to 1858, Captain Mark Huish, introduced methods of cost calculation in the mid-1850s in which cost per ton-mile and per passenger-mile statistics made their fi rst ‘appearance as regular management aids’ (Gourvish 1972: 240). 21 From 1850 the costs of the locomotive departments, responsible for the single largest element of operating costs, were calculated in terms of the cost of coke per train- and engine-miles for each division of the railway (Gourvish 1972: 240). The ton-mile statistics were generated by a special department set up in the general manager’s office, and they related to six monthly periods running from December to May, and June to November. Unfortunately, this meant that they could not be correlated with the half-yearly revenue and cost figures which were calculated over the periods January–June and July–December (Gourvish 1972: 249–250). While the LNWR calculated revenue per mile and per train-mile at this time, for costs there is no evidence that they went

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down to the level of the cost per type of vehicle-mile suggested by Lardner (1850: 226). 22 In the next section attention turns to the role of cost and profit centres in generating relevant information for decision makers in industrial concerns.

5.3. Cost/Profit Centres As noted previously in this chapter, sub-dividing a business into either cost or profit centres gives rise to two main accounting issues, each of which is now considered. 5.3.1 Departmental Transfer Pricing Focusing on the Industrial Revolution period, departmental accounts, in Pollard’s opinion, represented ‘one of the most advanced accounting techniques then in use in industry’ (1965: 223). Jones (1985: 86–88, 107) notes the recording of internal transfers within the Crawshay ledger of 1791–98, and recounts corresponding evidence relating to the Llanelly Copper Works in 1807–08, where raw material flows, stocks and quantities of ore smelted were recorded, together with annual calculations of the cost per ton of ore smelted, sub-divided into each expense item. In the cotton industry, internal flows between production departments were tracked within the DEB system operated by the Charlton Cotton Mills from 1810 (Stone 1973). John Vivian, of the Cornish Metal Co., a fi rm of copper smelters in Wales, kept an annual breakdown of historical costs in various parts of the business from 1822 to 1866 based on accounts for individual cost centres (Edwards and Newell 1991: 48–49). Practices with respect to transfer pricing would vary, even within a single industrial sector, reflecting the differing desires or perceived needs of those running the businesses. Nevertheless, there is evidence that while raw materials were usually charged to production departments at prime cost, transfers between production departments were made at accounting prices linked (loosely or closely) to market price. At the Charlton Mills, from 1810, raw cotton was transferred from the warehouse to the carding rooms at prime cost, but ‘intracompany prices’ were used for transfers between departments, though the basis of their determination is unclear (Stone 1973: 78). In the iron industry the processing of ore and other raw materials into cannons (Carron), iron rails (Cyfarthfa), forge and bar iron and rods (Staveley) were all tracked via production departments used as cost centres. But the method of transfer pricing between production departments could differ both between companies and over time. Thus, at Carron, material inputs to the blast furnaces in the 1790s were charged at standard costs23 (Fleischman and Parker 1990: 218), while at Staveley between 1690 and 1783 the outputs of operating departments which interfaced partly with the market were

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valued at accounting prices which approximated to market prices (Boyns and Edwards 1995: 11). Between 1838 and 1841 the transfer prices used at the company were below market price but were subjected to periodic adjustment (Edwards, Boyns and Anderson 1995: 9–10). After changes were made to the accounting system during 1856, the transfer prices generally became, again, closer to market prices. In the mid-1870s, however, it was revealed that ironstone was charged to the blast furnaces at cost price, whereupon the board of directors determined that ‘the furnace should be debited at the market price so as to show if there was a gain or loss by the undertaking’ (quoted in Edwards, Boyns and Anderson 1995: 24). The willingness of managements to change the system of transfer pricing to reflect important issues facing the business can be illustrated by another vertically integrated coal and iron producer, Consett, whose archives reveal that, in 1867, the company began to adopt accounting prices in place of the system based on historic cost which it had inherited from the former company running the works. This change, which enabled the relative profitability of the coal- and iron-making departments to be identified, was undertaken to help management determine whether to cease iron manufacture (Boyns and Edwards 1995). A series of modifications to accounting practice increasingly linked transfer prices to market prices, with strict price-setting formulas fi xed in 1870 (Boyns and Edwards 1995: 38–39). The purpose of accounting may of course be viewed differently by individuals implicated in the change process and, at Consett, created friction between its new manager, William Jenkins, who had joined the company from Dowlais in 1869, and the board of directors. Jenkins, in line with the practice employed at Dowlais (Boyns and Edwards 1997b: 18), favoured recording transfers at cost and, from the second half of 1873, the Consett cost books reverted to this system. However, the board, at least until 1884, had the company’s auditors draw up two sets of annual accounts: one on the basis of transfers at cost, and the other showing the profits earned by different products based on transfers of coal and coke at accounting prices linked to the net selling price of coke. About the same time, in February 1870, the board of Bolckow Vaughan agreed that iron costs should be calculated on two different bases: the existing method under which ironstone and coal were charged to the ironworks at cost, and the method suggest by Mr. Cheetham, namely that they be charged at the market price (BV records, Directors’ Minutes, 16 February 1870).24 It seems likely that more was done in some industries and firms than in others. William Clark, of the Somerset shoe-making business, for example, developed a scheme of accounts, c.1862, which enabled the departmental breakdown of costs and profits for at least eight separate lines of business (Sutton 1979: 54). On the railways, however, the consensus among historians is that c.1870 ‘the elementary costing procedures employed by the railway companies coupled with the lack of satisfactory statistics . . . meant that railways were in no position to determine accurately the costs

154 A History of Management Accounting of operating any particular parts of the system’ (Aldcroft 1968: 14). Pollins (1971: 91) has argued that ‘They did not bother with useful series, like tonmile statistics, and they did not keep separate records of their various lines. They could not know whether one line was more profitable than another’. Huish’s attempts to develop statistical analysis at the LNWR seem to have been unusual and it has been suggested that its impact was short-lived (Aldcroft 1968: 180). 25 5.3.2 Overheads The issue of overheads and their apportionment26 is a problem for any fi rm operating a multi-stage production process which adopts a full (total) cost approach to cost calculation and which produces a range of products, each of which passes through a number of production processes. 27 Methods of apportionment almost inevitably involve an arbitrary element, thus resulting in the generation of product costs whose link to manufacturing realities may be damaged. It is for this reason that some twentieth-century academics have questioned the suitability for managerial decision making purposes of product costs based on the full (or absorption) cost approach (e.g., members of the LSE School in the 1930s, such as Ronald Coase and Ronald Edwards, and Wells (1978)). Nevertheless, during the years between c.1760 and c.1870 and of course beyond, businessmen and accountants have been heavily engaged in apportioning overheads to processes and products. Fleischman and Parker (1991: 364) found that, among their sample of 25 fi rms, 16 (or 64%) engaged in overhead accounting. A specific example provided involved the Carron Company where, in 1763, the General Court ordered the provision of a breakdown of all costs for each product individually, and that this analysis was to include overheads (Fleischman and Parker 1991: 365). The accounting system used at Staveley prior to 1783 included the apportionment of overheads (Edwards and Boyns 1992: 163– 164), while Jones (1985: 103) notes that, by the 1790s, ‘certain [Welsh] iron companies were distinguishing between overhead expenses which were of a general nature and those which had a direct affi nity with production activity’. While the former would be written off to the general profit and loss account, the latter would be transferred to relevant activity centres under the heading ‘sundries’, such as occurred at the Cyfarthfa Ironworks. During the Industrial Revolution, overheads were sometimes apportioned to the main cost centres through the use of predetermined application rates: ‘The methods resembled those suggested by Metcalfe (1885) but lacked the sophistication of techniques advanced by Church (1916)’ (Fleischman and Parker 1991: 366). Predetermined application rates were used at Carron from 1763, and at Dowlais and two textile fi rms Marshall and Strutt before 1850 (Rimmer 1960; Edwards and Baber 1979; Fleischman and Parker 1990). In these examples, the basis of the formula used is unclear. A lack of sophistication in the construction of recovery rates is evident at Charlton

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Mills from 1810, where Stone (1973: 77–78) noted that apportionment was by ‘apparently arbitrary amounts which differed by center but which were a constant amount for each center for a period of one or two years’. According to Stone (1973: 78), the system ‘appears to have been an embarrassment to the book-keeper’ since it resulted in a very large balance of under-absorbed general expenses. At the Dowlais Iron Company in 1847 the stated aim of apportioning ‘general charges’ to different departments in multiples of £31/5/–was to approximate actual overheads so as to keep under or overrecoveries to a minimum (Boyns and Edwards 1997a: 33). In the monthly cost sheets for 1851 general expenses were apportioned at Dowlais as follows: £50 to each of coal, blast engines and forge engines; £100 to the ironstone mines; £450 to the furnaces; £300 each to the puddling forges and rolling mills; but nothing to the limestone pits or refi neries. The differential apportionments suggest that some attempt was possibly being made to link general charges to the benefits received (Boyns and Edwards 1997b: 16). Although many fi rms continued to make apportionments on an unknown basis, some fi rms did use methods that later became well recognised. Thus Jones (1985: 104) cites an 1822 prospectus-type document relating to the Cambrian Smelting and Coal Company in which overheads were apportioned on the basis of direct labour hours. In 1830, in a statement of the cost of smelting copper at the Mona Mine on Anglesey, overheads were charged via a percentage addition to direct cost using the prime cost method (Jones 1985: 106). By the end of the time-span of this chapter, there is evidence of a movement towards apportioning overheads on the basis of throughput. At the Wigan Coal & Iron Co. Ltd. most overheads were apportioned to cost centres on the basis of a standard charge for ‘Rent’, ‘Horses Work’, ‘Depreciation’, and ‘Salary’ multiplied by the ‘get’ (Boyns and Edwards 1997b: 15). At Staveley, although colliery overheads were shared among the company’s four collieries equally in 1856, in subsequent years the process of apportioning overheads between the main departments, and then amongst the sub-elements thereof, was increasingly based on throughput (Edwards, Boyns and Anderson 1995) Before overheads could be apportioned to different cost centres, however, they required identification, and this raised the issue of what expenses should be included under that label. Perhaps the simplest solution is to treat as overheads all business costs other than raw materials and direct labour (i.e., prime cost28). Over time, more refi ned views emerged, suggesting that overheads should be split between those which could be linked to individual cost centres and those which could not. The former came to be known as departmental overheads while the latter attracted a variety of labels (see Chapter 7, Section 4). There is increasing evidence that overheads were included in cost calculations as the nineteenth century wore on but that practice might vary a great deal from company to company as well as over time. Given the level of disagreement between twentieth-century academics debating whether or not it was legitimate to include particular overheads in

156 A History of Management Accounting cost figures designed for managerial purposes (see also Chapter 9, Section 3), this is perhaps not altogether surprising. Differences in the choice of items to include in overheads apportioned to individual cost centres could be explained on the grounds of differential managerial needs. For the purpose of price determination, all expenses, whether of production, selling, distribution or administration, would need to be included in order to discover whether the business had made a profit. Thus, when Wedgwood generated product cost information as the basis for reviewing his pricing policy during August and September 1772 (Fleischman and Tyson 1993: 509; see also Fleischman and Parker 1991: 365), he included items such as administrative costs and the ‘expenses of sale’ (McKendrick 1970: 49). At the Charlton Mills, from 1810, general expenses, comprising the cost of ‘containers, carting, packing, advertising, legal expenses, taxes and the London sales allowance’, were debited in the bi-monthly cost accounts (Stone 1973: 77). In the 1860s, Consett’s absorption cost system included ‘general charges’, which embraced stationery and salaries, commission, insurance, rates and taxes, horse depreciation, railway working, damages, gas and water (Boyns and Edwards 1995: 36). The fortnightly profit and loss accounts at Nostell colliery from December 1869 include, in addition to prime costs, railway charges, rates & taxes, office expenses, salaries, trade charges, interest, sundries, rents and coal consumed (Leeds NC 2). Where product cost information was required for purposes other than price determination, such as monitoring the efficiency of a cost/profit centre and its management, the inclusion of overheads which were outside the control of cost centre managers would render the data inappropriate. Thus, at the south Wales coal company, Powell Duffryn, indirect expenses such as ‘offices, agents and shipping’ were not charged to the individual collieries in the late 1860s/early 1870s, being instead written off at company level. Individual colliery cost sheets for 1864 and 1871 focused on prime costs, though they did include charges for ‘tentale’ (i.e., royalty), ‘rates, taxes, etc.’ and ‘sundry general charges’ (Boyns 1993). The treatment of depreciation and imputed interest on capital in company accounts has attracted a fair degree of attention from historians. Their observations and our present knowledge of accounting practices in these areas are considered in turn. (i)

Fixed Capital and Depreciation

The Industrial Revolution did not create the problem of accounting for depreciation, but it certainly exacerbated it as investment in fi xed capital increased. Pollard (1965: 233) claimed that the leaders of businesses during the Industrial Revolution seemed unable to integrate fi xed capital into their schemas, their practices ‘characterized by two main heresies: the treatment of capital as an auxiliary to entrepreneurship instead of the central motive

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force behind the fi rm and the confusion between capital and revenue’. For Pollard (1965: 245), without any ‘purposeful capital accounting, there could be no rational use of accounts for managerial guidance’. While for Bryer (2000b: 329; see also Bryer 1993), it is when ‘capitalist depreciation’ is taken into account that profit figures provide meaningful performance measures for absentee owners (socialisation of capital). As late as the 1840s, however, ‘virtually all “new work” [capital expenditure] was written off immediately against revenue’ at the Dowlais Iron Company, which then operated the largest ironworks in Britain, if not the world (Edwards 1989: 83). Jones (1985: 158) found no mention of the term ‘depreciation’ in the pre–Industrial Revolution accounts and records of Welsh businesses which he examined (see Chapter 5). Even during the Industrial Revolution, where terminology suggestive of depreciation was used, namely words such as ‘wear’ and ‘wear and tear’, it may have merely signalled an allowance for repairs (Pollard 1968: 283: Jones 1985) or both depreciation and repairs (Bryer 2005: 44). One possible explanation for the lack of any direct reference to depreciation during the early years of the Industrial Revolution is that agricultural and industrial properties were invariably leased rather than owned by the farmer or businessman. Moreover, for an ironmaker, where the blast furnace and utensils could have a long life, perhaps extending over the entire period of a lease, a depreciation charge was irrelevant, it being sufficient to charge associated maintenance and repair costs to production, together with the rental charge. Thus Jones (1985: 159) concluded that, among Welsh ironworks, depreciation was mainly ignored as a specific cost in arriving at profitability. The furnaces, plant and machines etc. originally installed were intended to be kept in good repair and any writing off was done by way of ‘appropriation’ of profits, seemingly on the basis of what the traffic could bear. While the term may not have been used, depreciation was charged in the accounts of some businesses. Thus, Pollard (1965: 244) notes depreciation charged on buildings, steam engines and machinery at a number of fi rms between 1769 (Carron) and the 1830s (several textile and iron fi rms). In Wales, Jones (1985: 159) found his fi rst hint of a depreciation charge in the books of the Stanley Smelting company in 1788–89, although the reason for the write-offs is not given. By the 1820s, the evidence is more solid. The 1822 prospectus issued by the Cambrian Smelting and Coal Company included in overheads the item ‘Wear & tear, rent, etc.’ (Jones 1985: 104), while a pattern of depreciation accounting appears to have emerged in the late 1820s at the Mona (copper) Mine. Here, the value of certain pieces of plant, in particular steam engines and a calciner, were gradually written down in value (Jones 1985: 165–166). A significant development in the accounting for capital assets occurred between 1830 and 1850 with the

158 A History of Management Accounting development of the railways. Since these were highly capital-intensive businesses, depreciation became a major issue. Initially, certain railway companies included depreciation in their accounts to cover the deterioration of rolling stock and, by 1850, some had begun to establish depreciation funds which, with compound interest, would accumulate ‘the total amount required to restore the line to its original condition’ (quoted in Edwards and Newell 1991: 52–53; see also Edwards 1986: 251–255). While there is some evidence of depreciation being charged in profit and loss accounts, what of its inclusion in cost calculations? Once again there is some evidence that this practice was becoming more common after 1800 (Fleischman and Parker 1997), with the practice surfacing in the textile industry during the fi rst half of the nineteenth century (Hudson 1994: 445). While other overheads were charged in the bi-monthly management accounts of Charlton Mills, depreciation was charged every six months at a rate of 5% per annum. Stone (1973: 77) also notes that an extra amount was frequently added ‘to bring the building and equipment accounts to an even thousand £ figure’, possibly for aesthetic reasons, but also possibly representing a recognition of the fact that attempts to measure the consumption of capital are necessarily imprecise. In the iron industry, depreciation was included as an item in the cost sheets for each profit centre at the Staveley Ironworks by the mid-nineteenth century (e.g., collieries, pig iron production and castings) (Edwards, Boyns and Anderson 1995: 14–19). The depreciation rate charged on individual items varied between 5% and 10% and contributed to the ‘Total cost including interest and depreciation’. However, when the works was taken under the control of the Staveley Coal & Iron Co. Ltd. in 1863, the practice of charging depreciation to the individual cost/profit centres was abandoned, though it continued to be recognised in the company’s annual accounts (Edwards, Boyns and Anderson 1995: 22). (ii)

Imputed Interest as a Cost

Pollard (1965: 234) claimed that interest was frequently treated as a cost in post factum accounts. While ‘frequently’ is probably too strong a word, examples can be found in calculations carried out both within and outside the ledger. Calculations within the ledger were designed to reflect the opportunity cost sentiment expressed by the chief agent of Lord Uxbridge in 1788, namely that ‘every concern in the Trade ought to pay interest for the money employed in it’ (quoted in Jones 1985: 168). Calculations of this type may be found in the Crawshay ledger for 1791–98 (Jones 1985: 169) and in the books of the Charlton Mills commencing 1810 (Stone 1973: 77), where the calculated cost of business operations includes interest imputed at 5% on the owners’ capital investment. Wedgwood included ‘Interest on Capital in Trade’ in the cost accounts he drew up in late 1772 (McKendrick 1970: 49), while the flax manufacturer

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John Marshall & Co. apportioned overheads, including interest costs, ‘across the fi rm’s flax, spinning, twisting, finishing, making up and sales departments’ (Fleischman, Parker and Vamplew 1991: 19). In the middle decades of the nineteenth century, cost sheets at the Staveley iron concern included an imputed charge to cover interest on the capital invested in the fi xed assets used by each profit centre (Edwards, Boyns and Anderson 1995: 14). The interest rate applied varied from 3.5% to 5%, roughly in line with central government interest rates at the time. However, when the business was transferred to the newly created Staveley Coal and Iron Co. Ltd. in July 1863, imputed interest was no longer charged to profit centres, possibly due to the influence of the company’s auditors, Chadwick, Collier & Company (Edwards, Boyns and Anderson 1995: 22). The next section reviews the possible uses made by management of the cost accounting practices presented above.

6. THE USES MADE OF COST/PROFIT INFORMATION Cost information can be used to make many different types of decision, both routine and strategic. An important objective of cost calculations is to provide the information required for price-fi xing purposes. Thus Wedgwood used his cost study of 1772 to fi x the prices for his products, while at Boulton & Watt costs recorded in the ‘engine books’ were used both to fi x prices and assess profitability (Williams 1999: 85; Fleischman and Parker 1991: 365). At the Dowlais Iron Company, having read the company’s Letter books covering the period 1784–1852, Jones (1985: 110) reached the conclusion that in fi xing prices ‘management looked backwards at calculated book costs and forward to gauging what the traffic will bear’. Cost information can also form the basis of strategic decision making, such as evaluating investment opportunities, choosing between alternative courses of action, and other aspects of forward planning. At Carron from the 1760s, cost data was used to make product-line decisions, for example, to discontinue the production of loss-making products (Fleischman and Parker 1990: 216–217). In their Dowlais study, Boyns and Edwards (1997a) found accounting information playing a full part in decisions to switch from iron to steel manufacture taken in the late 1850s and 1860s. At the Consett Iron Company, as noted above, alterations were made to the transfer pricing system in the late 1860s/early 1870s designed to allow management to assess alternative courses of action relating to the iron side of the business (Boyns and Edwards 1995). Fleischman and Parker (1991: 366) note that during the Industrial Revolution period, ‘Capital equipment purchases, mineral field leases, and major technology decisions (e.g., the introduction of the power loom) were all undertaken after a careful consideration of the cost of alternatives. Subcontracting and transport options were likewise evaluated’. At Carron, cost

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information was used to measure the impact of different sorts of coal on the cost of producing iron (1763) and to investigate alternative methods of producing coal (1768) (Fleischman and Parker 1990: 217), while at the Herculaneum and Wedgwood pottery concerns, cost calculations examined different transportation options, including the construction of a canal to the Wedgwood pottery in 1765 (Fleischman and Parker 1990: 367). Boyns and Edwards (1997b) note that the practices attributed to Carron by Fleischman and Parker can be found in the records of iron and steel manufacturers throughout the nineteenth century. In assessing planned ventures, Pollard (1965: 234) cited examples such as the Soho Foundry of Boulton and Watt, the Mona Mine Co. (1810) and the Carron Co. to support the conclusion that interest was ‘universally’ treated as a cost. Although Pollard was probably overstating the case, there are plentiful examples of fi nancial calculations, usually incorporating an allowance for interest at 5%, prepared to enable eighteenth-century managers choose between alternatives (Jones 1985: 168–171; Straker 1931: 200). 29 Thus, the Mona Mine Company’s accountant, Thomas Beer, conducted a series of relative cost calculations, based on a form of ‘sensitivity analysis’, to enable the company’s management make an informed judgement as to whether copper ore should continue to be smelted on Anglesey and marketed through Liverpool, or whether it should be sold at Swansea. Although assumptions were made that favoured the Liverpool option, Swansea clearly came out better, and the Anglesey smelter was closed in 1833 (Jones 1985: 231–236). 30 The Mona mine example is of particular interest because, in his calculations, Thomas Beer included an allowance for the ‘loss of time and consequent interest of money’ (letter from Thomas Beer dated 21 July 1828, quoted in Jones 1985: 231). Concerning the determination of the ‘Net value of copper sold at Liverpool’, the statement accompanying Beer’s letter contains an estimate of interest for 12 months (the time the raw copper ore was in stock before being calcined) at 5% on the value of ore when put in the kiln and ‘Interest from the time of smelting until the net proceeds of sale are cash at Bankers—say 6 months’ (Jones 1985: 232). An interest payment is also included in estimating the ‘Net value of raw ore sold at Swansea’, namely ‘Interest from the time of shipment until cash at bankers, say 4 months at 5 per cent’. The idea of taking account of the time value of money invested in an activity was not altogether new. The application of DCF techniques for the purpose of business decision-making dates from at least the eighteenth century when Tyneside coal viewers acted as valuers ‘whenever an owner or part-owner wished to sell, or more commonly when an owner died and the value of his holding had to be estimated for his executors’ (Flinn 1984: 60). Brackenborough, McLean and Oldroyd (2001: 140) discovered the initial appearance of DCF in colliery viewers’ books in 1772, with its more regular use dating from 1801. They see its adoption as

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a specific wealth-maximization response to the economic conditions of the day . . . a clear case of accounting and engineering technologies combining to facilitate the exploitation of deep coal reserves, where accounting acted as a determinant of industrial expansion. (Brackenborough, McLean and Oldroyd 2001: 137) Brackenborough, McLean and Oldroyd (2001: 141) also reveal an example of DCF used to compare alternative investments, namely the exercise performed by John Watson, Jr. in 1813 who discounted the projected annual revenues at the rate of 10% plus an ‘addition of interest for the risque of the colliery not being let at the time specified’. The DCF technique continued to be heavily used by viewers and valuers throughout the nineteenth century. In the third-quarter of the century it was regularly used by William Armstrong, the ‘accountant, economist and engineer’ (Pitts 2001: 33), who was often called in by major coal, iron and steel companies in the north of England to value mines and other incomeproducing assets. Armstrong also used the annuity method to determine the amount to be set aside for the depreciation and replacement of fi xed assets (Pitts 2001; see also Edwards and Warman 1981). Use of the DCF method was by no means universal of course, but other capital project appraisal methods were also employed such as the payback method to evaluate the planned investment in a new blowing engine at Staveley in 1867 (Directors’ Minutes, 19 October 1867). Taking strategic decisions clearly involves forward planning. While investment decisions were frequently considered on a one-off basis, they were often part of a wider scheme of developments affecting a business. Some businessmen clearly considered projects in a co-ordinated fashion, though there is little evidence of calculations in which a series of interrelated investments were considered together. This is not to suggest that there were no signs of forward planning in a more regular sense. In the mid-nineteenth century, Captain Mark Huish of the LNWR, for example, attempted to carry out ‘forward planning’ on the basis of the statistical analysis generated by a special department created in 1854. Gourvish (1972: 264) notes that ‘General business strategies were created, cost and traffic trends were projected, and the General Manager was at the centre of a vast network of planning procedures’, though not all of these activities proved successful. Accurate measures of profit are required in order for owners to make informed judgements as to whether or not the business should continue to operate. Increasingly, however, businessmen were concerned that money tied up in their business should earn an adequate rate of return. Pollard (1965: 235) claimed that ‘contemporaries [of the Industrial Revolution] did not attempt any calculations of the profit rate on capital in the modern sense’ but Bryer (2005, 2006b) has begged to differ. In his view, the Industrial Revolution provides the first substantive evidence of the emergence of a

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capitalist mentality, as indicated by calculations of the rate of return on capital employed (ROCE). After a careful examination of the evidence presented by Bryer, and that produced by other historians, Toms (2010: 218) concurs with Pollard’s earlier assessment, concluding that ‘ROCE calculations in the return on investment . . . sense were the exception rather than the rule before 1840 and investors used variants of ROCA [return on capital advanced] for a long period thereafter’. He continues (Toms 2010: 218), Whereas it may be true that landlords, manufacturing entrepreneurs and ultimately managers were concerned to earn excess return on capital, there is no evidence in this case that it comes from a capitalist mentality of pursuing ROCE, since there are few surviving examples of such calculations being performed. Reflecting his belief that the forces of production and the socialisation of capital, and the interaction between them, influence the choice of method, Toms (2010: 219) explains his fi ndings by noting that ‘Modern capitalism as a mentality required the demise fi rst of usury in the courts and associated restrictions on risk free returns, and then of the labour theory of value in the realm of political economy’.31 Examples of the use of ROCA in the middle of the nineteenth century include the Ashington Coal Company where a report prepared in 1843 demonstrated that a ‘bottom line profit of £2,302’ represented a 17.25% return on capital (Fleischman and Parker 1997: 139). Rates of return, however, could fluctuate greatly from year to year, especially in an industry such as coal where prices were highly volatile. Expectations of the rates of return that might be earned naturally varied a great deal (Pitts and Boyns 2011). The purchasers of 25-year redeemable ‘preference’ shares in the newly formed Cannock Chase Co. Ltd. in 1859, for example, could anticipate an expected internal rate of return of 13.5% (Cannock Chase Articles of Association 1859, No. 25), while share prospectuses issued by south Wales colliery companies in the 1860s and early 1870s show provision for ‘guaranteed’ returns32 rising from 7.5% in the early 1860s to 10% in the early 1870s (Pitts and Boyns 2011). Church, Baldwin and Berry (1994: 716) note that the professional valuers called in to fi x a purchase price for the Bolckow Vaughan partnership in the mid-1860s suggested 15% as a ‘fair and legitimate’ ex ante return on equity investment in an integrated coal, iron and steel producer. However, in his speech to the 1867 annual general meeting of the newly established Bolckow Vaughan & Co. Ltd., Benjamin Whitworth shared his belief that ‘coal alone will always give a very fair return for the whole of the capital invested, and anything you may get from the iron will be an addition in the shape of a bonus’ (AGM report, p.16). Also in 1867, the, managing director of the integrated Staveley concern, Charles Markham, prepared a report which indicated a potential return of 12% on the required capital investment (including cottages and railway

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wagons) for a new coal sinking at Hollingswood to increase coal production by 25% (Matlock, D3808—Minute Book 1866–71, Markham’s Report, 16 December 1867, f. 7).

7. OVERVIEW While much remains unknown about cost calculation practices during the period between c.1760 and c.1870, archival research since 1965 has revealed a wealth of detail sufficient to reject Pollard’s pessimistic conclusions regarding cost calculation practices during the Industrial Revolution. 33 Notwithstanding the lack of contemporary texts related to the matter, businessmen were actively involved in calculating costs and, in their attempt to derive figures relevant for business decision making, they confronted key issues which have continued to concern businessmen and accountants through to the present day: whether or how overheads should be apportioned to products and/or cost/profit centres in multi-product, multi-process businesses; whether depreciation and imputed interest on capital should be included in overheads; and what system of transfer pricing should be adopted. These issues clearly also exercised the minds of a small number of authors of accounting texts. It is impossible, in our given state of knowledge, to claim that the use of certain techniques was widespread but, equally, it cannot be reliably concluded that the various examples so far uncovered in the archives represent the entirety of such cases. Sometimes they may reflect the extent of such practices, but the limited survival of accounting records means that this can probably never be known for certain. The incompleteness of surviving records also makes it difficult to identify the nature of the accounting systems used to generate cost information. However, it would be wise to bear in mind McLean’s (1995) warning that some businesses created the impression that their cost and fi nancial accounts were not part of a single system by relegating the bulk of the cost calculations to subsidiary records. Loose-leaf statements, whether of costs or profits, could suggest that these calculations had nothing to do with the formal accounts, but that, of course, need not be the case; they may simply have been written on separate sheets for ease of use and/or communication. As time progressed texts dealing with DEB systems indicated both an increase in the number of books that should be kept and the maintenance of additional supplementary books which did not form part of the formal accounting system.34 Certainly, historians should not assume the absence of a DEB-based costing system simply because fragmentary evidence of cost calculations have survived in circumstance where the formal accounting system is absent from the archive. Evidence provided in this chapter shows that cost information was systematically generated far more frequently than was believed to be the case

164 A History of Management Accounting even 25 years ago, and that it was used for both routine and strategic decision making prior to 1870. Cost data were also used for fi xing prices and/or as the basis for tendering for contracts, as well as for monitoring/ control purposes, assisted by the practice in cost statements of presenting data on prime cost as well as total cost. While the systematic generation of cost information can serve useful managerial purposes, such information does not, of itself, necessarily ensure profitability or long-term business survival. The existence of a DEB system which generated cost information on a regular basis did not prevent a long-term decline in profit in the second half of the eighteenth century at the business which comprised the Duke of Norfolk’s Works (Staveley) and the ‘Derby and Nottinghamshire Company’ (Edwards and Boyns 1992: 167), although it did survive into the twentieth century. A noticeable feature of accounting at Staveley and other businesses whose systems have been the subject of longitudinal studies extending over decades or longer periods of time, is the relative stability of the underlying systems. However, this does not necessarily mean that significant changes were not incorporated over time reflecting the changing demands of the businessmen and managers for whom the cost data were generated. McLean’s study of the Sunderland traders, shipowners and shipbuilders, Laings, during the nineteenth century, for example, reveals the continuous revision of the accounting process necessary ‘in a competitive environment during a period of technological and organizational change’ (1995: 142). New cost information was assembled and used for performance assessment and pricing decisions, just as it was at other businesses such as Staveley. Previous historians, especially those from different ideological persuasions, have downplayed the relevance of such fi ndings, not least by arguing that the cost data generated by such systems was unsuitable for the purposes for which it was used. Historians from different schools have suggested that one of the roles played by accounting during the Industrial Revolution was to monitor and/or control labour, but they vary in their assessment of the extent to which this was the major preoccupation. The neoclassical historians, Fleischman, Parker and Vamplew (1991: 19), for example, note its application for labour-control purposes, but merely as one of a range of uses to which cost information was put. The Marxist historians Hopper and Armstrong (1991) see the development of accounting controls focused on labour being ‘rooted in struggles as fi rms attempted to control labour processes in various epochs of capitalistic development’. Bryer sees the history of cost calculation in terms of the development of a capitalist mentality, namely the pursuit of the maximisation of profits by capitalists through the exploitation of labour. For Bryer (2005), evidence of such a capitalist mentality was exhibited at Boulton & Watt’s Soho Foundry in the late eighteenth century, through the addition of an element representing the return on capital employed in their cost and price calculations but, as noted above, Toms (2010) dates such changes much later in the nineteenth century.

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Clearly the Industrial Revolution placed new demands on labour, and created new difficulties for those employing a large workforce. The exodus of labour from the land generated issues relating to discipline designed to ensure regularity of work patterns as labour moved away from agricultural work rhythms, dominated by the seasons, to a more monotonous routine governed by steam power and machinery. Thus, Hoskin and Macve, utilising a Foucauldian perspective, suggest that a major role for cost calculation was as a disciplinary device. However, at the Dowlais Iron Company, Boyns and Edwards (1996) found no evidence of cost data used to exert disciplinary control over the labour force in the middle of the nineteenth century, though it was used for other purposes and figures of labour costs per ton were generated which we might imagine were used to monitor efficiency. While Dowlais may have been different from other fi rms, or the socio-organizational context (e.g., sub-contracting, use of fi nes, etc.) within which the company operated at that time meant that cost calculations did not have to be used in this way, it is an over-simplification of the role of accounting in the workplace to insist that the main, or sole, raison d’être of late eighteenth- and nineteenth-century cost calculation was the monitoring and control of labour. Indeed, other mechanisms began to be developed for this purpose. Thus, the Industrial Revolution period bore witness to the emergence of group piecework systems in copper and tin mines (Pollard 1965: 223) while, in 1833, Charles Babbage worked out ‘a more detailed analysis of the effect of monetary incentives on work’ (Pollard 1965: 225). Much of the development of piecework systems, however, appears to have come after 1870 (Smith and Boyns 2005: 196–199). Clearly cost information was sometimes used differently by fi rms, reflecting the business methods of those involved in managing the concerns. It will be seen that in subsequent epochs much emphasis has been placed on the effect of business size and complex organizational structures (e.g., Chandler’s M-form) on developments in cost calculation practices. However, in this chapter it has been noted that techniques and/or tools which have often been associated with these late nineteenth- and twentieth-century developments, such as standards and standard costs, budgeting, use of ex post rates of return and so on, were already in use in some fi rms long before 1870. While it is not always simple to explain either why such techniques were used, or why their use does not appear to have spread more widely, it is possible to gain some insights. Thus, Fleischman and Parker (1991: 370) have suggested that differences in cost calculation practices during the Industrial Revolution period ‘between textile and iron concerns appear to have been a function of fi rm complexity’. They did not, however, fi nd any simple correlation between fi rm size and the volume of cost management activity, with new ideas developed and utilised in small and medium-sized fi rms just as easily as in large fi rms. The idea of Chandler (1962) that organizational structure follows strategy receives no support from study of the Dowlais case during the 1850s (Boyns and Edwards 1997a). Indeed, the link between

166 A History of Management Accounting these elements is clearly more complex, possibly reflecting, as Alford (1976: 59) has suggested, a symbiotic rather than causal relationship. Nevertheless, there can be little doubt that, despite earlier developments, Littleton (1933: 360) was correct when he suggested that the Industrial Revolution period was ‘an important element in . . . the expansion of bookkeeping (a record) into accounting (a managerial instrument of precision)’. However, the evidence presented in this chapter shows that the Industrial Revolution did not represent a major discontinuity. Rather, it signalled an important phase in the evolution of cost calculation practices from the previous era through to developments during the post-1870 period which we begin to address in the next chapter.

7

The Second Industrial Revolution, c.1870–c.1918

1. INTRODUCTION During the late nineteenth and early twentieth centuries, a period which has been referred to as the Second Industrial Revolution, the decline of agriculture continued, so that it accounted for 6.4% of Britain’s national output in 1913 (see Table 6.4), the same as mining and quarrying, while manufacturing, transport and communication, commerce and ‘public and professional’ continued to grow. The overall rates of output growth in several other industrialised and industrialising nations began to outstrip that of Britain, threatening her economic dominance. With other countries embracing new technologies in steel manufacture, in chemicals and in electrical engineering, British fi rms found it increasingly difficult to compete in these sectors and in the production of new consumer goods such as the motorcar. Although there are disagreements as to precisely when Britain’s relative economic decline set in, by the First World War it is clear that Britain’s growth rate was lagging behind those of major competitors such as Germany and the USA (Lewis 1967; Kirby 1981). Initially, the First World War had a limited impact on business, but after the Great Shell Scandal of early 1915, governmental intervention in business affairs increased (Pollard 1969: Chapter 2), taking the form of regulations which affected the ways in which fi rms could operate and legislation which enabled their activities to be commandeered in pursuit of the war effort. From a position of ‘business as usual’1 at the outset of the war, by the end large swathes of the British economy had been affected by government activity. In such circumstances it is not surprising to fi nd that historians such as Loft (1986, 1994) have suggested that the war had a major impact on cost calculation practices as a result of the activities of the Ministry of Munitions. The lasting effect of the Ministry’s wartime influence, however, is not uncontroversial, as will be made clear in the chapter. Neither did the war prevent the long-term relative decline of the British economy. Indeed, by emphasising the importance of some sectors in the short-term and retarding investment in others, the war may have exacerbated preexisting problems.

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Whether or not there was a degree of inevitably in Britain’s relative decline (the country forms only 0.16% of the total land area of the world and accounted for only about 2.5% of the world’s population on the eve of the First World War), commentators, both contemporary and historical, have pointed the fi nger of blame for relative decline at one group or another. For many, the cause of the problem was British fi rms and their management: British managers were not professional; they were inappropriately educated/poorly trained or otherwise ill-equipped to run their businesses. In part the criticism was based on the argument that, despite the growth of limited liability companies, many remained family concerns and continued to employ family members in key managerial posts (Chandler 1990). In addition it has often been argued that the techniques employed by British management in running their businesses, including methods of cost calculation were, at best, antiquated and, at worst, largely non-existent. Due to such deficiencies, managerial control and decision making were poor. Since the publication of Chandler’s Scale and Scope in 1990, accounting historians have revealed more evidence relating to cost calculation practices in the post-1870 era, enabling some of Chandler’s assertions to be placed under the microscope. Certainly the literature, especially from the late 1880s, developed substantially through the publication of books specifically devoted to cost issues and articles appearing in accounting and other professional journals. Many commentators and historians up to c.1990, however, characterised cost calculation practices during the period c.1870– c.1918 as little used and of poor quality. Knowledge of late nineteenth- and early twentieth-century cost calculation practices has of course increased greatly in the last 20 years and a different history can now be written. The emerging literature began to raise issues of terminology and, even prior to 1918, some writers urged that cost calculation be conducted in a more scientific manner, with attempts made to establish its principles and objectives. This development was clearly linked to the process of scientification which had begun to pervade many areas of business (and non-business) life in the early twentieth century, and this of course included the practice of scientific management. However, as will be shown in Chapter 8, only after 1918 was a serious attempt made to establish cost calculation as a science. Section 2 below focuses attention on the development of the literature and theory during the Second Industrial Revolution, while Section 3 examines developments in practice. Section 4 examines two specific issues which illustrate our major themes of continuity and change, namely overheads and uniform (or standardised) costing, and our concluding remarks are then presented.

2. LITERATURE AND THEORY In marked contrast to what had gone before, the last few decades of the nineteenth century witnessed a major development in the literature relating

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to cost calculation. This enabled Solomons (1952a: 17), based partly on the earlier work of a former LSE colleague, Ronald S. Edwards (1937b), to famously declare that this period represented a ‘costing renaissance in the English speaking world’. For Solomons (1952a: 17), the 1880s and 1890s were decades in which new authors rediscovered ‘ideas that were becoming of great practical importance for the fi rst time but which could certainly have been found, though perhaps in an undeveloped state, in earlier works’. The reasons for this upsurge are not entirely clear, but Solomons (1952a: 19) suggests that it reflected contemporary difficulties associated with price fi xing faced by the engineering industry. It was certainly facilitated by the appearance of professional accounting journals as a forum for discussing accounting issues. In the remainder of this section, developments in two sources of literature—journals and books—are examined and the changing focus of the literature over time is considered.

2.1. Books Although the 1870s witnessed the publication of a small number of short works dedicated to the subject matter of cost calculation in a manufacturing context (e.g., Walker 1875), or longer texts which contained a chapter related to the topic (e.g., Carter 18742), it was the late 1880s which witnessed the emergence of the fi rst British textbooks dedicated to the subject. Online searches of major bibliographic databases such as COPAC3 and Worldcat,4 however, suggest that the number of British texts containing in their title the words or phrases ‘cost accounts’, ‘cost accounting’ or ‘costing’ published before 1914 was only around 30, with up to 10 more published during the war years. However, such words or phrases were not always used by authors on cost calculation, as demonstrated by the titles of the two best-known texts to be published in the 1880s: Factory Accounts (1887) written jointly by the electrical engineer Emile Garcke and the incorporated accountant John Manger Fells; and Textile Manufacturers’ BookKeeping (1889) written by the chartered accountant George Pepler Norton. The importance of these two works5 is reflected in the fact that each ran to multiple editions: the seventh edition of Factory Accounts was published in 1922 and the fi fth edition of Norton’s text in 1931. After the turn of the century texts on cost calculation became more common, but only two published before 1914 exceeded five editions, namely the incorporated accountant William Strachan’s Cost Accounts: The Key to Economy in Manufacture, which appeared in six editions between 1902 and 1936, and Cost Accounts by the chartered accountant and partner of George Touche, Leslie Whittem Hawkins, which ran to ten editions between 1905 and 1943. Another multi-edition work fi rst published before the First World War set out the uniform costing system recommended by the British Federation of Master Printers (BFMP)6 for use by the printing trade.7 A further important text to appear on the eve of the First World War, and

170 A History of Management Accounting which was to make a significant impact during the war itself, was Factory Administration and Accounts, written by the former works accountant to Messrs. Vickers, Sons & Maxim Ltd. and departmental works manager of BSA Ltd., Edward T. Elbourne.8 Early texts varied enormously in size. The two leading publications of the 1880s were relatively large, containing more than 240 pages. New works published at the beginning of the twentieth century (e.g., Strachan 1902; Hawkins 1905; Garry 1906; Ridgway 1911; Gledhill 1917) tended to be much shorter, between 70 and 120 pages in length. A notable exception was Elbourne’s work which occupied almost 600 pages. Shorter works either focused on a specific aspect of cost calculation or provided a concise general guide, and have often been overlooked by historians possibly because their authors failed to explore major issues in depth. Some, but not all, multiedition texts increased in size with successive editions, as additional material was covered to reflect new developments, and the coverage of earlier material was extended as a particular concept or technique became recognised as having greater significance. Thus, Strachan’s Cost Accounts, when first published in late 1902, was 75 pages long. In order ‘to meet the wishes of numerous readers’, the second edition (1903) included ‘an Appendix of Forms with specimen entries, for the purpose of illustrating the text and enabling the system to be more readily comprehended’ (Strachan 1903: iv). The 1920 edition, ‘revised and amplified in various respects’ was lengthened to 92 pages, accompanied by 28 pages of forms, including a section on ‘method of dealing with Machinery Costs’ and ‘additional Chapters . . . dealing with Interest on Capital and Mass Production’ (Strachan 1920: preface).

2.2. Journals Articles, letters and other pieces dealing with issues of cost calculation began to appear during the nineteenth century in trade and professional journals from a number of fields, including engineering, accounting and general business. The Accountant made its debut as a monthly publication in October 1874, becoming a weekly publication from 2 January 1875. The title page announced that it was ‘The organ of chartered accountants throughout the world’; a claim which was altered by 1920 to ‘The recognised weekly organ of chartered accountants and accountancy throughout the world’. Designed to cater for the needs of public accountants, it was not until 1885 that a reference to ‘cost’ (or any term related thereto) is found in the journal’s index, and then it is merely to ‘Cost Book Companies’, a specific form of ownership structure allowed in mines operated under the Stanneries Act. Regular mentions of ‘costs’ or a related phrase are to be found in the index to The Accountant commencing 1890, the year following the fi rst appearance of The Incorporated Accountants’ Journal, the monthly journal of the upstart Society of Incorporated Accountants (Parker 1969: 146).9 In Scotland the Accountants’ Magazine made its debut in 1897 (Parker

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1969: 148). Up to 1918, these journals represented the main accounting outlets for articles related to cost calculation and have therefore provided a major source of the information used in the latter chapters of this book. Outside the accounting sphere, the main sources of writings on cost calculation were engineering and other trade journals such as Engineering, The Engineering Review and Electricity and Electrical Engineering. Papers published in journals were often reproductions of previously presented speeches. Some focused on general issues whereas others were oriented towards topics of specific interest to the audience being addressed, be it a body of engineers or a chartered accountant students’ society. Together, they provide valuable additional insights into cost calculation and other relevant issues at this stage in the development of management accounting.

2.3. Focus of the Literature With little prior literature to draw on, early authors often adopted an idiosyncratic approach to their topic. Such a situation was probably a good thing, enabling the boundaries of the subject to be explored from a number of different perspectives. Over time, and particularly after 1918 (see Chapters 8 and 9), the literature became more standardised as attempts were made to defi ne the topic and create its boundaries. Early texts were mostly aimed at manufacturers and those in charge of what became known as the cost or works accounting function, such as engineers and cost clerks as well as at accountants. Thus the sub-title of Garcke and Fells (1887) is A Handbook for Accountants and Manufacturers, while the work of the chartered accountant A. Clifford Ridgway (1911) was aimed at manufacturers, and that of Elbourne (1914) at managers, accountants and engineers. Strachan’s work was aimed principally at manufacturers but he hoped that it would ‘be of service to professional accountants in introducing the subject to their clients’ (preface to fi rst edition of 1902 reproduced in 1903: iii). Other works aimed directly at engineers and/or those engaged in installing systems of cost calculation include those of John Walker10 (1875), Hawkins (1905) and Arthur Henry Gledhill11 (1917). The content, approach and method of presentation adopted by early writers of books varied enormously. Most included tables, figures and forms for illustrative purposes. Gledhill (1917), for example, comprises illustrations of the various elements of a system of cost calculation, showing his reader how to record various items on the forms or cost cards that he reproduced, the techniques to be used, and how to present the data. His work, as with that of Strachan (1903: iii), was designed for the practical man wishing to construct his own system of cost calculation. Both were of a different nature from that of Norton which, rather than being concerned with cost accounts per se, presented a DEB system for use by textile manufacturers. While Norton refers to Mill and Factory Books, and to the accounts of the manufacturing departments (see Appendix 7.1), in many ways the work had

172 A History of Management Accounting stronger links with the tradition of earlier texts (see Chapter 6), namely the use of subsidiary books in conjunction with a DEB system, than with those published in the twentieth century. Also, Norton’s book was a very different animal from that written two years earlier by Garcke and Fells (1887: v; emphasis added), which was designed to provide a ‘systematised statement of the principles regulating Factory Accounts; and of the methods by which these principles can be put into practice’. This ground-breaking work was followed by others which increasingly began to focus not only on the practical issues of how to keep cost records but also on theoretical issues, such as (1) what items to include in overheads and how those items should be apportioned to cost centres and products, and (2) general issues such as systematisation, principles and objectives. These are now discussed. 2.3.1. Overheads and Their Apportionment In Solomons’ opinion, the formulation of refi ned methods of overhead apportionment represented a key development during the 1870–1918 period. A relevant contemporary work was Walker (1875: 94–96) which stressed the need to consider the treatment of non-manufacturing or general expenses of the business in order to determine costs accurately. The key issues in achieving this goal, for Walker and most writers, revolved around the identification of items to be included in overheads and the method used to allocate or apportion them to departments or products. Part of the reason for writers adopting different positions on the fi rst issue was the lack of a standardised terminology, which meant that what was considered to fall within the term ‘overheads’, as compared to ‘prime costs’, varied from one writer to another. Walker (1875: 55) provided the following statement: Casting, three cwts. at 4s per cwt. Moulding, three days, at 5s. Superintending and Laboring [sic.], 3s. per cwt. Coke, Sand, Blacking, &c., 6d. per cwt. Melting and Dressing, 4d. per cwt. Total

0 0 0 0 0

12 15 9 1 1

0 0 0 6 0

£1 18 6

Dividing the total by three gave the ‘average fi nished cost per cwt as 12s. 10d. nett’ (Walker 1875: 55). For Garcke and Fells (1887: 218), prime cost was defi ned as the ‘original or direct cost of an article’, and it was noted that it should be distinguished from ‘cost of production’ which they defi ned as the ‘total expenditure incurred in the production of a commodity’ (1887: 216). For Hawkins (1905: 4), prime cost, which he considered to be the same as direct charges, comprised direct wages, materials and chargeable expenses, while Ridgway (1911: 2) defi ned it as labour plus materials plus direct expenses. The key question for such writers was which expenses to

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charge direct to the product and which constituted general expenses. Two issues noted in previous chapters which also featured prominently in this context were the treatment of depreciation and imputed interest. For Walker (1875: 55–56), to obtain the ‘real total cost’ of a casting when it left the works, a charge was required to cover ‘Rent, Taxes, Clerks, Draughtsmen and Engineers’ Salaries, and numerous other Expenses, such as Travellers’ Salaries and Expenses, etc.’. Walker (1875: 96) does not explicitly mention depreciation, but he does favour inclusion of interest on the capital sunk ‘in the Works, in Buildings, Plant, Machinery, &c.’. While writers such as the Scottish chartered accountant John Mann Jr. (1891), who later joined the Ministry of Munitions as Controller of Munitions Contracts and succeeded Samuel Hardman Lever as fi nancial secretary to the Ministry in 1917 (Matthews, Anderson and Edwards 1998: 153), and John B. Bardsley (1902: 1091), continued to recognise only the interest paid on borrowed money, there was an increasing trend towards acceptance of the opportunity cost view advocated by economists. Norton (1889: 79; see also Ridgway 1911: 2) agrees with Walker that interest on capital employed in the business ‘should never be omitted in calculating the profit of a business’, noting that it would have to be paid if the money had been borrowed. The chartered accountant and later Director of Accounting at the Ministry of Munitions during the First World War, Mark Webster Jenkinson (1914: 573), agreed with economists regarding interest as a cost of production, but pointed out that the appropriate treatment for fi nancial reporting purposes needed to be quite different, and he explained why: for the purposes of ascertaining the profit of a company legally divisible among the members as a dividend, it is a recognised principle that anticipated profits are not available, and therefore, interest being only a form of profit, the amount, if any, included in the work in progress, must be written back for Balance Sheet purposes. On the issue of depreciation, Ridgway (1911: 39) reported that it represented ‘a vexed question both with proprietors and auditors’,12 also referring to ‘the anomalous position taken up by the Income Tax authorities’.13 Within the overall literature, however, there was a growing momentum in favour of identifying and, in appropriate circumstances, including depreciation in cost calculations. Garcke and Fells (1887: 216) defined depreciation as the ‘falling off in the value of buildings, machinery, plant, and other assets’, but offered only a ‘cursory examination of the fundamental principles to be observed’ (1887: 96), pointing the interested reader in the direction of Matheson’s book, Depreciation of Factories and their Valuation (1884) for further illumination. Writing in the same decade, Norton (1889: 233; emphasis in original) noted that, while ‘existing Works, Plant, Machinery, &c., should be efficiently maintained, by all necessary repairs and renewals, out of revenue . . . in addition, the Trading Account should bear an adequate charge for depreciation’.

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Norton also provided a list of depreciation rates for various items, for example leases, mills, warehouses, motive plant, machinery, furniture and fixtures, and so on (1889: 236). On the accounting treatment of depreciation, Garcke and Fells (1887: 7) distinguished between those situations in which ‘indirect charges and depreciation are of more or less fixed character’, and those where they ‘formed a more direct element in the cost of production’, that is, they varied with production. Whereas in the former case ‘it is probably sufficient to know the cost of an article in wages and materials only’, namely the focus being on prime cost, in the latter case, which applied in ‘some trades’, ‘it may be a matter of convenience to include in the cost of production [as distinct from prime cost] a proportion of indirect expenses and a charge for depreciation on plant and buildings’ (Garcke and Fell 1887: 14). While Garcke and Fells saw depreciation as a charge over and above prime cost and indirect expenses, Ridgway (1911: 2) advocated the inclusion of depreciation within direct expenses, which he considered to form part of prime cost. Gledhill (1917: 44) indicated that in determining the proper percentage to be charged for overheads it was necessary to include ‘a large number of items that do not enter the commercial accounts as actual payments’, amongst which was the depreciation ‘not chargeable to a shop or department’. As well as having different views about which items should be regarded as overhead expenses, writers of the late nineteenth and early twentieth centuries also differed over their favoured method of apportioning overheads, and some helpfully explained their choice. Walker (1875: 55) referred to the need to add a percentage of overheads to the prime cost to obtain ‘real cost’. Walker noted that the percentage must necessarily be approximate, being either ‘given by the Manager, or left to the [Prime Cost] Clerk’s own judgement’ (1875: 56). In 1878, Thomas Battersby, a Manchester public accountant, noted seven different methods in use for estimating ‘actual costs’, which generally involved adding some percentage to material and/or labour costs to cover both overheads and profit (Solomons 1952a: 22). Battersby considered that these common methods were largely based on ‘mere assumption and opinion’ (1878: 33) and, instead, advocated a system of ‘Prime Cost and Profit’ based on ‘absolute principles’ which ‘recognises only facts of [double entry] Book-keeping with reference to the working of a particular business’. In his system, Battersby defined ‘nett prime cost’ as raw material costs plus wages plus ‘working and upholding’, namely direct expenses, to which were added general (or indirect) expenses, such as salaries, rent and taxes, and so on to generate ‘gross prime cost’ (1878: 35). Indirect expenses were to be included by adding a fixed percentage on wages. Garcke and Fells (1887: 72) noted that, in many firms, all costs other than prime cost were transferred direct to the profit and loss account, but considered that a more efficient check could be kept on indirect expenses if they were distributed ‘over the various jobs as a percentage, either upon the wages expended upon the jobs respectively, or upon the cost of both wages and materials’. While favouring the former approach, since some material prices could fluctuate greatly, Garcke and Fells (1887: 73) considered that ‘a relation based upon the time during which

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the labour is employed, instead of upon the amount of the wages paid, would be more accurate’. Mann (1891: 635) noted that, in theory, direct overheads varied ‘directly with the [labour] time occupied [on each job] and inversely as the wages paid’, and thus that the basis of apportionment should be labour time rather than wages paid. This was a view increasingly shared by writers on the topic such as David Cowan (1901: 90) and Gledhill (1917: 3, see also 72), with the latter insisting: ‘The foundation upon which a costing system rests is the time spent on the job’. We can therefore observe, during the early decades of the twentieth century, a growing pre-occupation with accurately determining product costs and, for many authors, this necessitated a scientific approach to cost calculation. The chartered accountant, Harvey Preen, roundly criticised the practice of ‘adding a bit’ for overheads as unscientific, noting that there is ‘no use guessing at some [details] and taking others at approximate figures’ (1907: 69). Ridgway (1911: 31) noted that the rough-and-ready method of fi xing one percentage to cover all indirect expenses is manifestly inaccurate and unscientific, for the reason that work requiring the use of expensive machinery would, under this system, bear precisely the same proportion of establishment charges as work performed with a cheap tool. A memo prepared by Price, Waterhouse & Co. for submission to the Electrical Trades Commission of the Board of Trade in November 1916 reiterated such views, indicating that, while the application of a percentage on the direct labour cost method might give fairly accurate results where all products were of the same nature, it was not scientific (TNA BT55/21, f. 9). The need for a more scientific approach to the apportionment of overheads so as to more accurately determine a product’s cost was, in part, driven by the development, during the Second Industrial Revolution, of more complex products and the advent of new and more technologically advanced production methods, especially in the engineering sector. As Elbourne (1915: 392) put it, ‘One of the most important results that should ensue from the exercise of the scientific spirit in factory accounting is . . . the investigation of the true cost of each article made’. Early twentieth-century writers such as the engineer Alexander Hamilton Church (1901), the chartered accountant John Urie (1902) and Bardsley (1902) exemplified a ‘scientific’ viewpoint which increasingly focused on the use of machine rate methods for apportioning overheads. A key figure in the pursuit of the ‘scientific’ was Church, who is recognised as the most influential early thinker on the issue of overhead recovery through his concept of the ‘scientific machine rate’ (see Solomons 1952a: 25–30). Church first presented his ideas to the public in a six-part article published in The Engineering Magazine in 1901, which was about the same time that he was employed as a consultant at the Manchester-based precision chain manufacturers, Hans Renold Ltd. (Boyns 2003). Church (1901: 729) believed that it was important to ‘seek a method capable of recording [cost]

176 A History of Management Accounting with approximate accuracy under the most complex and difficult conditions’. Echoing the opinion of his contemporaries, Church considered that ‘the business of costs [is] to represent facts and nothing but facts’ (1909–10: 26). Noting that, in real life, workshops or factories were often complex entities with different types of machinery and different qualities of labour employed, the percentage-on-wages and hourly burden systems would not, he believed, produce correct product costs. His solution was the scientific machine rate method designed to make it possible to distribute different types of overhead expense through a single rate attached to each independent production centre, namely a machine or bench at which a hand craftsman might work, utilised in the production process. Thus, building costs, such as capital cost, interest, rent, insurance, depreciation, heating, ventilation and lighting would be apportioned on the basis of the square footage operated by the machine, whereas power would be represented by a charge per horse-power hour. The various charges for the production centre were then aggregated and divided by the number of hours the centre was expected to operate in the forthcoming accounting period, thereby determining the overall hourly machine rate to be charged. While Church recognised that it might be impossible to apportion all overheads scientifically, his system was designed to minimise the figure which instead had to be charged to the company’s profit and loss account. Church therefore aimed to create an hourly machine rate which produced the apogee of ‘true’ product cost. Referring to Church’s system, Ridgway (1911: 103) noted that while it ‘may be considered ideal . . . whether many manufacturers would be prepared to go to the necessary expense of carrying out the method is an open question’. Reflecting on the operations conducted in larger businesses in 1916, Price, Waterhouse & Co. (TNA BT55/21, f. 10) noted that some types of overhead expense could quite easily be divided between departments, but that splitting departmental establishment expenses over the various operations conducted within each department was more complicated and involves an exhaustive examination of processes and an even more elaborate analysis of expenses. The cost of this work may easily be prohibitive in many cases and the more simple if less accurate method of a percentage division may sufficiently serve all purposes. Thus while methods such as that of Church might have been considered desirable in some quarters, in practice their application could be difficult, if not expensive, and may therefore not have been practicable at this time.14 Whatever the method of overhead apportionment chosen, there was also the question as to how the method should actually be applied, in particular, whether the rate determined should apply for a short period of time or over a longer period. Following the publication of the review of Hawkins’ text in The Accountant, an exchange between Hawkins and the editor(s) of the journal indicated a clear difference of opinion. Arguing from the perspective of ‘principle’, the editor(s) (The Accountant 32: 727) argued that:

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it is out of the question to leave the charging of the Oncost until the close of the period in question, if by “period” year or half-year be intended; but with a proper system of Cost Accounts there ought to be no insuperable difficulty in arriving at the aggregate amount of expenditure under each heading weekly or fortnightly and apportioning it then. Hawkins (The Accountant 33: 13) pointed out that such an approach would of necessity give rise to very frequent alterations of the rate of Oncost, would entail much additional calculation, and would multiply entries with a consequently increased risk of error, without so far as I am able to perceive, securing any corresponding advantage. While Hawkins was clearly concerned that the cost figures should prove useful to management, the editor(s) of The Accountant (33: 36) considered that ‘no cut-and-dried system can ever be expected to invariably produce useful results’. The editor(s) emphasised that a cost system must be based on ‘sound fundamental principle’, going on to add that ‘the whole system of equating the Oncost is an abrogation of all principle and reduces this portion of the costing to the level of the original estimates which, inter alia, it is supposed to check’. While the idea of apportioning overheads in order to accurately determine product cost was considered by many to be an important objective of costing (see next sub-section), some focused their attention on their differential character compared with direct costs. Thus Ridgway (1911: 107) noted that establishment charges remained largely fi xed, whatever the level of output, echoing comments made 80 years earlier by Babbage (1832).15 Although Ridgway drew no policy prescriptions from his observation, 20 years previously Garcke and Fells (1887: 74) had asserted that since establishment charges did not ‘vary proportionately with the volume of business’, they should not ‘form part of the cost of production’, there being no advantage in distributing them ‘over the various transactions or articles produced’. As Solomons (1952a: 36) points out, this stance located Garcke and Fells ‘among the founders of the “marginal cost” school of thought’ which gained momentum between the two world wars following the publication in 1923 of The Economics of Overhead Cost, written by the American economist J. Maurice Clark (see Chapter 9, Section 3). 2.3.2. Systematisation, Principles and Objectives The increasing desire for greater accuracy in cost calculation was, as we have seen, linked to the development of a more scientific approach. Echoes of this can be found in concerns with greater systematisation of cost calculation, the development of principles and the establishment of clear objectives. This need for systems to have objectives and to be rational in achieving them,

178 A History of Management Accounting not least through being based on key underlying principles, represented the beginnings of a process of scientification which is now examined.16 On the systematisation front it was noted in Chapter 6 that, prior to 1870, accounting texts which dealt with cost issues did so within a DEB framework which also fulfilled financial accounting requirements, with some authors suggesting the introduction of additional books to cater for the needs of manufacturers as an integral part of the system or supplemental to it. Walker (1875: 11) refers to the ‘six subsidiary books required to embody the information indispensibly [sic] necessary to actually determine the primary cost of any work required to be ascertained’. Battersby (1878) talked explicitly of two systems of double entry books being kept alongside one another: ‘The bookkeeping registers the expenses, and shows whether they increase or decrease, and the system of prime costs takes the data to account’ (Battersby 1878: 43). The two systems were interlocking with Battersby’s system of prime costs comprising ten different books. Garcke and Fells (1887: v) suggested that ‘the [accounting] books of a manufacturing business can scarcely be said to be complete and reliable unless they are supplemented by, and to a large extent based upon, the accounts special to a factory’. Norton (1889: 4) put forward a system in which ‘Mill and Factory Books’ comprised part of the DEB system, emphasising, ‘the books employed should not only be kept by double entry, but that they should be well devised, and thoroughly adapted to the particular trade’. The system advocated by Hawkins (1905: 3) was firmly ‘based on double-entry principles’ and, from that point onwards, writers of texts on cost calculation took for granted the fact that cost accounts would be kept in that manner, some making clear their assumption that the reader had a basic knowledge of the principles of DEB.17 The linking of cost and fi nancial records was considered to provide for a greater accuracy of the former, not least because it implied the introduction of a more scientific approach. Inaccuracy was a matter of concern for Thomas Plumpton ACA (1892a: 269) who argued that ‘The only true and correct system of Cost Accounts is that worked out on double entry system’. For small fi rms, this meant having the ‘Commercial Books’ and the ‘Cost Accounts’ interwoven but, in a large enterprise, where he believed that the magnitude of the work required would be large, Plumpton (1892b: 884) considered that the cost accounts should form a ‘separate and distinct set of Double Entry Accounts’. Similar views were expressed by Lawrence Dicksee, FCA and William Strachan. Dicksee (1903 [1976]: 220) considered that while cost accounts should be independent of the fi nancial accounts, they must be capable of reconciliation with them: a cost system being ‘complete’ only if reconciliation was possible and, indeed, was actually carried out. Strachan (1903: 75), while noting them to be separate, stated that the two systems, the ‘Costing System’ and ‘the fi nancial accounts’, ‘should be made to blend into and prove each other’. Price, Waterhouse & Co. identified full integration as the preferred option among the following three types of system (quotes in indented material taken from TNA BT55/21, f. 12):

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• ‘thoroughly efficient’, ‘elaborate’ systems whereby everything is worked through and balanced with the general books of account (i.e., a fully integrated system); • ‘Test cost systems in which the costs of all articles manufactured are carefully estimated and revised from a study of the actual operations as they take place’—a good test of the accuracy of such systems achieved by comparing book figures for stock with that found to be in existence through a periodic stock-taking (a reconciled/reconcilable system); and • ‘estimated costs independent of the actual accounts’ (a non-reconcilable system). The costs produced by the last category were considered to be ‘unreliable and misleading’ since they were ‘entirely incapable of proof’, while those generated by ‘test’ systems, which Price, Waterhouse suggested were ‘in frequent use’, were of variable reliability, since they were ‘usually [prepared] without the proof of accuracy afforded by an agreement with the journal books’. Writing in 1903, Mann observed that ‘really scientific [i.e., integrated] schemes are rare’ (1903 [1976]: 131) but, with the growth of greater systematisation and the advocacy of scientific principles through influences such as Taylorism and ‘scientific management’, the pressure for their adoption grew. A key aspect of the process of scientification of cost calculation was the establishment of underlying principles. Garcke and Fells (1887: v) claimed that their work represented ‘the first attempt to place before English readers a systematised statement of the principles regulating Factory Accounts’, adding that the ‘principles of Factory Accounts do not differ in the main from those general rules on which all sound book-keeping is based’. They also claimed that the ‘principles applied in these pages to recording the cost of production of any article are equally applicable to recording the cost of any or all of the parts of that article’ (1887: 64), that they had ‘a scientific basis’ but that they were ‘so little comprehended’ (Garcke and Fells 1887: 152). Strachan indicated that one of the aims in writing his text had been to set out ‘a proper system of Cost Accounts’ (1903: iii) and that, in embarking on this endeavour, he had been mindful of adhering ‘chiefly to leading principles’ (1903: iv). Hawkins (1905: iii) noted that his purpose was ‘to explain in general terms the principles relating to the ascertainment of manufacturing costs, and to make clear the operation of those principles by means of examples’, while Ridgway (1911: v) set out the principles associated with cost accounts before focusing on ‘actual practice’. The precise meaning of the term ‘principles’, as used by such authors is not entirely clear, since most left them unspecifi ed. Thus Norton (1889: iv) merely noted that the chief aim of his system, based on plentiful experience of bankruptcy work in the textile trade, was ‘to obtain everywhere accuracy, lucidity, and completeness by the shortest possible process’. Garcke and Fells (1887: v) emphasised the desire for accuracy and talk about the application of ‘fundamental axioms to the practice of an important and extending branch of industrial accounts’, but they

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never explain what these are. Like other authors of the time, their principles seemingly add up to little more than a description of what they saw as best practice. A couple of pre–First World War texts attempted to specify the aims or objectives of cost calculation. Thus, Hawkins (1905: 1) stated that the object of keeping Cost Accounts is to enable a manufacturer or contractor to ascertain the cost of every article he produces and of every contract he undertakes. With this information at his command he is enabled:— 1. To regulate his selling-prices according to cost, so far as the conditions of supply and demand permit. 2. To frame his estimates and tenders with a degree of accuracy which will materially help him to avoid making unduly low quotations, which would result in loss, or unnecessarily high ones, which would permit competitors to undersell him. 3. To fi nd out which branches of his business do or do not pay, and whether it is costing him more to produce any article than he could buy it for. 4. To establish a standard of cost for stock articles, and so provide a check on their cost for the future. 5. To lay his fi nger in weak places, and so detect waste of material and inefficient workmanship and management. Ridgway’s (1911: 1–2) ‘ideal system’ emphasised Points 3 and 5 in Hawkins’ list, before going on to list four uses of costing: (1) To throw light on past experience and to locate profits or losses on previous work. (2) To act as a guide for future transactions. (3) To compare different methods of manufacturing the same article. (4) To check employés and prevent waste both intentional and accidental. A more detailed statement of the objectives underlying the determination of costs was provided by Price, Waterhouse & Co. in November 1916. According to them, the purposes of ‘a modern cost system’ were as follows (TNA BT55/21, ff. 6–7):18 1. To ascertain the cost of the same product at different periods in the same factory or at the same period in different factories, and so to remedy inequalities in cost by reducing all to the results shown by the best. 2. To determine the effect of increased production in reducing costs. 3. To determine the effect of reductions in selling price resulting from increased competition.

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4. To adopt as a result of these comparisons better and more economical processes for manufacture and labour-saving devices, and generally to obtain a measure of relative efficiency. 5. To obtain, by means of an accurate ascertainment of the cost of output, running book inventories, which will show at any time, without a physical stock-taking how much of each class of materials, supplies, etc., is on hand, rendering possible a reduction of stocks (and capital invested therein) to the lowest level consistent with efficiency; and at the same time avoiding the delay, expense and interruption to business consequent upon the old method of a complete stock-taking at a specific date each year. 6. To provide statistical information as to costs of parts, quantity, and variety of output; relative efficiency of different classes of labour; and relative costs of labour and material, between different factories and periods. 7. To permit the preparation of periodical statements of income in a condensed form, readily giving directors all material information as to the results of the business. This is, perhaps, the least important of all the objects aimed at; and it may safely be said that the cost of a system designed merely to produce periodical statements of income without providing for the other and far more important objects set out above, would not be worth the expense incurred. 8. To provide a statistical comparison between production and capital invested involving the following factors:— a. The labour, material and expense cost of a unit of each class of article; b. Assets used in manufacture, such as land, buildings, machinery, tools, stocks on hand and other working capital, all segregated between the different classes of articles; c. The time during which such assets are in use for a unit of each class; d. The selling price of each unit of each class. Although there may have been a failure to indicate explicitly the principles which governed it, the statement of objectives in the pre-war literature signals an interest in the development of a theory surrounding cost calculation. When reviewed in The Accountant (14: 278), the fi rst edition of Garcke and Fells’ work was criticised for being ‘more of a theoretical than a practical work’.19. They were certainly not alone in focusing on theoretical issues. For example, Solomons (1952a: 38–39) considered that Factory Accounts, and the description of trade or ‘country’ prices in Norton’s work provide early hints in the direction of what would subsequently become the theory of standard costs. Indeed, Solomons suggests that Norton’s comparison of a fi rm’s costs with ‘outside’ values (see Appendix 7.1) ‘seems to be the

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nearest that the nineteenth century came to standard costing as we know it’ (1952a: 39). Another precursor of standard costing in Britain was the chartered accountant H. Stanley Garry who presented a paper to the Society of Chemical Industry in 190220 which contained references to the comparison of actual with standard costs. However, it was to be in America (e.g., Whitmore 1908; Emerson 1908, 1909) that many of the major developments in the literature on standard costs were to occur during the early decades of the twentieth century. Budgetary control was also more fully developed in the USA than in Britain between the wars. The fi rst literature in Britain to propose ‘the incorporation of budgets into the cost records for the purpose of controlling expenditure’ (Solomons 1952a: 47) is contained in Reorganisation and Costings (1907) written by the chartered accountant, Harvey Preen. ‘The Budget System’ (Preen 1907: 81–84) describes a hybrid monthly trading account containing both backward-looking elements, for example purchases, sales, debtors and creditors for the month just completed, and forward-looking elements, for example estimates of the following month’s purchases and cash requirements. The development of budgetary control and standard costing is examined more fully in Chapter 9, Section 5.

2.4. Summary By 1918 the literature on cost calculation had developed markedly compared to what was available in 1870. There were more texts dealing with the topic, and a steadily increasing journal literature, but some of the more notable developments of the twentieth century, such as standard costing, budgetary control and marginal costing, were yet to receive much attention. Nevertheless there were some signs of what was to come. The 1870– 1918 period witnessed a development of the terminology surrounding the subject of cost calculation, with the phrase ‘cost accounts’ appearing in the late nineteenth century followed by a switch towards ‘costing’ in the early twentieth century (for more discussion of this matter, see Chapter 8, especially Section 3). The main emphasis of the newly emerging literature was on the calculation of accurate product costs—often referred to as ‘the facts’—as a basis for fi xing prices. Authors increasingly recognised the importance of cost calculations in controlling waste and efficiency and for assisting management in decision making. In this sense it can be argued that the literature was beginning to catch up with practices which had long been carried out in an ever-increasing number of businesses. Other significant developments include the growing support for placing costing systems within the DEB framework and the increased attention paid to the application of overhead recovery rates in the determination of accurate or ‘true’ costs. In the next section we examine the development of cost practices, showing that those of earlier periods continued to be built upon and adapted to the ever-changing needs of management.

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3. COST CALCULATION PRACTICES Writers such as Marriner (1980) and Loft (1986) have portrayed the First World War as a major watershed in the development of cost calculation, with this characterisation based mainly on evidence gleaned from the available contemporary literature. Their view has perhaps paid insufficient attention to the actual state of cost practices prior to the First World War. For these reasons, our examination of cost calculation practices will focus fi rst on the period up to 1914 in order to provide an informed background for making an assessment of the impact of wartime developments.

3.1. c.1870–c.1914 Several early twentieth-century writers knew that cost calculation had a long history. Fells (1919a: 550) noted that ‘The need for costing has always been recognised, and there have been many systems practised’, adding that the ‘costing function’ had ‘preceded the structure of any cost accountancy systems’ (1919a: 548). James R. Massey (1919: 12) considered that there was ‘no doubt that the fundamental principles of it [i.e., costing] must have been used in some form or other, however, crudely, from the very commencement of trading in any form’. But he went on to add, ‘of late years it has developed more on the lines of an exact science, certain broad principles having come to be recognised as standard and which form a basis on which to build up the individual system’. William Annan, MA, CA, FCWA and Professor of Accounting and Business Method at Edinburgh University, considered that cost accounts had existed in Britain long before the First World War (1930: 183), but Bernard Thistlethwaite21 (1928: 149) suggested that cost accountancy was only thirty to forty years old, namely dating back to around the time when Garcke and Fells’ Factory Accounts was first published. What evidence do we have concerning the overall nature and extent of cost calculation in the late nineteenth and early twentieth centuries? Contemporary opinion was divided. Some writers argued that cost calculation was widespread, at least in certain sectors of the economy, while others were less convinced. Likewise, some observers felt that cost systems and cost accounts were becoming more scientific and accurate, while others did not. Even among those who considered that progress had been made, there was a tendency to emphasise the developments in particular industries or sectors, rather than across the economy as a whole. Both contemporary comment and archival research suggest that developments in cost calculation were mainly associated with the key industries of the First and Second Industrial Revolutions: coal mining, iron and steel manufacture, chemicals and engineering. Boyns (1993) found that the central feature of pre–First World War costing systems of south Wales colliery concerns, namely the cost sheet or cost book, largely mirrored that advocated in the cost accounting literature, having a focus on prime costs but also including some overheads. Reviewing affairs in

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the early 1890s, Plumpton (1892a: 268) noted that collieries ‘keep elaborate Cost Accounts of their workings’, but other evidence suggests that practices differed between firms. Dicksee (1917: 161) contended that there had been an overall lack of attention to cost calculation before the First World War, a neglect that was reflected in the poor staffing and low status of internal accounting departments (Dicksee 1915: 18–19).22 Jenkinson (1919b: 81) was less pessimistic. While complaining that ‘the Cost Sheets are badly designed, and the results obtained [often] unreliable’, he pointed out that some large colliery companies have ‘exceedingly good costing systems in operation, and a valuable fund of statistical information is collected and used by the management for control purposes’. The preparation and use of monthly or more regular cost sheets to monitor performance in the coal industry was found by Boyns and Wale (1996) to comprise a key element in colliery management information systems from the 1870s. Major decisions, in contrast, were more likely to be taken on the basis of specially prepared ad hoc reports, often produced by consulting mining engineers. Numerous comments on developments within manufacturing can be found in the contemporary literature. Plumpton (1892a: 268) proffered the view that costs were tracked in many manufacturing trades, while a decade later F.G. Burton, ASAA, remarked that it was ‘in the more complex trades, such as large chemical manufactories and mechanical or civil engineering works, that we shall fi nd the greatest use for Cost Accounts’ (1901: 115). The importance of manufacturing industry was stressed by leader writers in various professional journals: The Incorporated Accountants’ Journal noted that ‘cost accounts’ were to be met with more in the great manufacturing centres of the northern counties than in the metropolis (Dec. 1901: 54) while, nine years later, The Accountant (Sept. 1910: 395) insisted that experience of ‘cost accounts’ was confi ned largely to localities where manufacturing was most highly organised. If contemporary writers are to be believed, not all owners of manufacturing businesses were convinced of the relevance of keeping costs. The leader writers of The Incorporated Accountants’ Journal (Mar. 1901: 101) suggested that ‘The keeping of proper cost accounts . . . is generally looked upon by the manufacturer himself more as a luxury than a necessity, and only in a very few industries has it come to be a recognised element in the counting-house system’. For Jenkinson (1907: 316), the greatest problem was amongst small manufacturers, who complained ‘that profits are so small’ they could not ‘afford the expense’. Just before the First World War, C.D. Britten (1912: 449) likewise criticised small manufacturers for a lack of willingness to adopt what they saw as expensive systems. One significant criticism made by public accountants of British manufacturers before 1914 was that their methods of generating cost data were incomplete, namely they did not address the issue of overheads or, if they did, only in a perfunctory manner. W.R. Hamilton, FCA, for example, noted that while all manufacturers had some way of arriving at prime cost,

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it could be somewhat crude, though it probably did ‘not depart materially from fact, or would not do so if only they were tightened up so as to provide for possible dishonesty, and, what is far more to be feared, waste through carelessness’ (1910: 202). A few years earlier Strachan had commented that British manufacturers usually have their own methods of costing—mental or otherwise— which are very imperfect; in fact, I should think that in the majority of cases where rough and ready calculations are applied, establishment expenses are left out of account altogether, and as these are often heavy, the results arrived at must necessarily be very inaccurate and misleading. (The Incorporated Accountants’ Journal, Dec. 1901: 64) Strachan’s concern was that the figures in cost accounts should tie up with those in the fi nancial accounts, and that this could only be achieved if overheads were included. Given the views of Garcke and Fells (1887) noted above, and subsequent debates regarding the validity of including overheads in cost calculations (Chapter 9, Section 3), it is far from clear that Strachan’s concerns represent a valid criticism of methods of cost calculation used by pre–First World War manufacturers. The term ‘manufacturing’, however, covers a broad area of economic activity. The three main sectors for which archival research has been conducted for the period 1870–1914 are iron and steel, chemicals and engineering. For the iron and steel industry, Boyns and Edwards (1997b) show how cost systems developed by companies such as Dowlais and Staveley long before 1870 continued to be used and developed thereafter. In newly formed joint-stock companies, such systems were sometimes installed with the assistance of accounting fi rms, such as Deloitte, Dever, Griffiths & Co. and John Adamson & Co. at the Shelton Iron Steel & Coal Co. Ltd. c.1889–90, and by W.B. Peat & Co. at the South Durham Iron & Steel Co. Ltd., where the fi rm developed a scheme of uniform accounts in December 1898 (Matthews, Anderson and Edwards 1998: 115). The chartered accountant, Thomas Plumpton (1892a: 268), claimed to have recently helped to install a ‘thorough system of departmental costs in a large steel works not many miles from here [Manchester], a fi rm that employs 1,500 workmen’. With DEB the ‘specialist abstract knowledge’ (Edwards, Anderson and Chandler 2007: 63) on which public accountants partly based their professionalisation process, the systems of cost calculation were naturally integrated within the financial accounting framework. Specific features of systems used in iron and steel companies in the late nineteenth and early twentieth centuries include the preparation of cost sheets to establish the departmental cost of production, the apportionment of overheads to identify total cost, and the use of transfer prices to track the movement of goods between departments. Whereas cost sheets had previously been drawn up on a six-monthly basis, around the turn of the century they were increasingly prepared for shorter periods, such as a month, and

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increasingly contained measures of cost per ton as well as total cost. Thus, while the Old Castle Iron & Tinplate Co. Ltd. produced half-yearly statements of manufacturing costs for each product in the early 1880s (Swansea, Old Castle C38, C40), and was still doing so in 1928 (Swansea, Old Castle C41), by 1907 it also compiled fortnightly cost figures for the company as a whole (Swansea, Old Castle C17). Physical yields were also calculated and used as performance indicators to monitor progress, while many fi rms favoured the use of market prices for transferring goods between departments, thereby enabling the assessment of departmental profitability. Boyns and Edwards (1997b: 20) concluded that, among integrated coal, iron and steel fi rms during the second half of the nineteenth century, ‘a significant degree of diff usion was apparent in key areas of accounting practice’. Dicksee (1917: 161), writing towards the end of the period covered in this chapter, while reporting that cost calculation was widespread in the iron and steel industry, considered it to be of variable quality. The chemical industry was one of the two ‘complex trades’ singled out by F.G. Burton, ASAA, where ‘Cost Accounts’ would be of ‘the greatest use’ (1901: 115). Research (Matthews, Boyns and Edwards 2003; Boyns, Matthews and Edwards 2004) has shown that, from the middle of the nineteenth century, a number of chemical companies actively developed their cost calculation methods despite the relative lack of a relevant literature. Cost statements produced by fi rms such as British Xylonite, Brunner, Mond & Co., Albright & Wilson, United Alkali and Castner-Kellner included at least some overheads. Concerning the contentious areas discussed above, there is insufficient detail to determine whether depreciation was included in overheads (for further details see Section 4 below), and certainly there is no evidence that imputed interest on the capital invested was ever included up to 1918. Nor was it included by Brunner Mond for the purpose of reaching the strategic decision whether to produce soda using the Leblanc and Solvay processes in the 1870s, although the comparison did include allowances for depreciation on the respective plants. Moving to the engineering sector, Plumpton (1892a: 268) considered that ‘no firm of engineers would seek to carry on their business without some description of costs, for it is the backbone of their business’. His view is borne out by archival research on engineering firms such as Hans Renold Ltd. (Boyns 2003), on shipbuilding firms in the north-east of England (McLean 1995), and on engineering and metals firms operating in the west of Scotland (Fleming, McKinstry and Wallace 2000; McKinstry 1989). Given the breadth of the engineering sector it is perhaps not surprising to find high variability in the techniques used, though there is some evidence that the major differences occurred between firms using contract costing and those employing process costing. With one or two exceptions, firms operating a contract cost system incorporated overheads in their cost estimates and in their finished cost statements. Some of them clearly included depreciation within such charges, but others used blanket phrases such as ‘general charges’ which makes it

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impossible to discover what was covered. No evidence has been uncovered to show that imputed interest on invested capital was included. Overall, then, cost calculation became more widespread in the pre–First World War period. And, while a leader comment in The Accountant (Sept. 1910: 395) pointed to the ‘proper or scientific treatment of Cost Accounts . . . [as being] a comparatively new development’, in reality observed growth built on practices of earlier epochs. Methods of cost calculation had not been static before 1870 and they remained dynamic in the period to 1914. Practices undoubtedly varied between fi rms, even within the same sector, though the evidence suggests that size was not a major factor in such differences (Boyns and Edwards 2007)—a fi nding which is consistent with that of Fleischman and Parker (1991: 370) for the Industrial Revolution period. Within the engineering industry, Solomons (1952a: 19) pointed to the growing level of competition 23 and the increasing difficulty faced by fi rms in price fi xing for the development of cost calculation after 1870. However, the widespread use before the First World War of cost systems outside engineering suggests that other factors may also have been at work. Massey (1919: 12–13) attributed the then recent rise of a more scientific approach towards cost calculation to the wider emergence of the joint-stock company and the growing divorce of ownership from control. Or, as he put it, the loss of the ‘personal element in the management of the business’ (Massey 1919: 13). Clearly, as managerial hierarchies became more complex, the potential use of accounting numbers for control purposes increased (see, for example, Chandler 1977, 1990; Johnson and Kaplan 1987).

3.2. First World War In her acclaimed studies, Loft (1986: 144; see also 1990) has noted that it was during the First World War that ‘cost accounting’ came ‘into the light’, 24 even if it was the result of the ‘unforeseen consequence of certain actions of the government’ (Loft 1995: 38). However, interpretations of the impact of the First World War on cost calculation within British industry depend to a large extent on how one views its pre-war history. For Elbourne (1919: v), before the war cost calculation had only been ‘receiving adequate attention’ here and there, while the businessman Lord Leverhulme (Hazell 1921: 5, foreword) claimed that manufacturers had been able to ‘conduct their business successfully with any old method of arriving at costs of production they had in service’. E.W. Newman, ACA (1921: 2) considered pre-war cost calculation methods to have been ‘crude’, suggesting that manufacturers had nevertheless been able to survive since all fi rms in a particular competitive field would tend to make ‘the same mistakes’. While there are many negative assessments of the state of cost calculation before the war, equally, as the previous sub-section made clear, these views do not reflect a broad consensus on the matter. Archival research conducted since Loft carried out her important studies has provided support

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for contemporaries who held a more positive view of pre-war developments. Despite this, it seems clear that there was plenty of scope for development of cost calculation methods and for their more widespread use within some sectors of British industry. Elbourne (1919: v) believed that the war had drawn public attention to ‘the value of Costing’, with commentators suggesting three reasons: the increased need to control costs as a result of rising prices during wartime; increased market uncertainty following the war; and the impact of government controls imposed during the war, in particular through the Ministry of Munitions. In a foreword to Hazell’s (1921: 5) book, Lord Leverhulme advised that by making everything, especially labour, more expensive, the war had made it ‘absolutely imperative that to-day the manufacturer must discard all pre-war methods of costings and adopt the most complete, thorough, and most modern system of costing that can be placed at his service’. W.H. Hazell (1921: 21), president of the BFMP, pointed to the rapidly changing market environment which meant that ‘some system is needed which will enable a manufacturer to obtain a knowledge of his costs daily, quickly, and accurately’, while Newman (1921: 2) noted the ‘general desire amongst manufacturers to abandon methods which do not promote’ business efficiency and stability. F. Woolley, FSAA, noted that the war had taught businessmen how to keep records, something which would be of great use in the future (Elliott 1921: 473). For many observers it was through the work of the Ministry of Munitions that the greatest impact had been felt. E. Castleton Elliott, FSAA (1921: 467) commented: ‘although just as important before the war as during it and after it’, ‘Costing . . . has come into its own’ as a result of the wartime cost investigations conducted by the Ministry of Munitions. After the war, Sir Lynden Macassey, following a visit to a marine engineering shop at which he had previously worked, noted ‘how the work [in that shop] was re-organised after the adoption of a system of cost accounting by the Government . . . [and] All kinds of improved methods and revised organisations had naturally followed’ (Fells 1922a: 124). Sir Arthur P.M. Fleming, CBE, MIEE25 (Workman 1929: iii) stressed the role of war-time controls in encouraging the installation ‘of efficient costing methods’, emphasising the ‘value of accurate Cost Accounting’. Government influence here was generally seen to emanate from the Ministry of Munitions which required shell factories to keep accurate costs and encouraged efficiency through comparisons between different factories (Hazell 1921: 18–19). After the war officials from the Ministry claimed that, as a result of cost investigations carried out under its auspices, ‘large areas of British industry were introduced to best-practice cost accounting formerly restricted to small numbers of fi rms’ (Marriner 1980: 463). It is certainly true that changes to the Defence of the Realm Act (DORA) in early 1916 allowed for manufacturers’ books to be checked in order to ascertain cost, but it is much less clear that this led to any significant changes in cost calculation methods.

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Under DORA three methods could be used to ascertain cost: technical costings, accountancy costing and cost returns from the National Factories. Loft (1986: 145) points out that, in 1917 alone, some 2,500 technical estimates and c.1,000 accountancy investigations were undertaken, but also draws attention to the fact that the Ministry of Munitions experienced ‘great difficulty’ in fi nding ‘competent persons’ to do the work. The government did, of course, enlist some important recruits from amongst the ranks of public accountants, including Samuel Hardman Lever26, Gilbert Garnsey27 of Price Waterhouse, William H. Peat28 and Mark Webster Jenkinson, all of whom received honours after the war. While such individuals clearly helped to bring the activities of accountants more into the public eye, the impact of the Ministry on the cost calculation practices within business was not unreservedly considered to have been positive. Unfavourable comments abound in the fi rst edition of The Cost Accountant, the journal of the ICWA fi rst published in June 1921. Thus, in a comment on the fi nal meeting of the Central Committee under the Profiteering Acts, it was noted that the results of the various late government “Costings Departments” have not been anything like a brilliant success and have undoubtedly been the cause of creating an unfavourable impression with most manufacturers as to the real necessity of an efficient costing system. (The Cost Accountant 1: 2) The motor manufacturer, Sir Herbert Austin, remarked that ‘everybody’ complained that ‘the cost keeping of the Government, particularly during the War, was very very bad’ (The Cost Accountant 1: 22). He also revealed that his own plans to ‘perfect a scheme of works control’ had had to be put on the back burner during the war (Perry-Keene, 1922–23: 284). Sir John Keane, hon. FWCA, expressed his hope that accounting after the war would not be ‘a perpetuation of what we saw largely during the War: that amateurs who knew little or nothing about the subjects were put in all kinds of important positions’ (The Cost Accountant 1: 16). E. Brown, FCIS (1921–22: 250), agreed that some of the government wartime inspectors who visited fi rms in the heavy iron and steel trades in the Midlands to ‘spread the light’ were generally unable ‘to offer any practical alternative to existing methods, while some of them knew so little of the practical working of the industry as to give up any attempt to make a real check of the figures submitted’. Loft (1986: 147) recognised some of the limitations of wartime cost investigations, quoting the following from The Accountant, July 1919: ‘In retrospect, after the war it was felt that costing investigations were not so effective as they could have been, one of the problems being the lack of training of those carrying them out’. Fells (1919a: 551) observed that systems which had been introduced during the war were ‘not cost systems in the truest sense of the word, as they are very often not in accord with, but very largely independent

190 A History of Management Accounting of, the commercial accounts of the firm whose products are costed’. In consequence, dubious results were produced and, in Fells’ view, could have encouraged ‘indiscriminate contracting or buying by individuals for the State on the basis of cost plus percentage’ (1919a: 551). He went on to criticise the cost plus system as where ‘madness lies, because human nature being what it is, there will be no incentive to reduce the cost’, though he expressed the hope that such ‘costings’ merely represented a passing phase on the way towards the introduction of ‘proper systems of costing’ (Fells 1919a: 551). According to Elliott (1921: 470), a key feature of Fells’ criticism was that methods introduced by the Ministry were ‘rather based more on estimates than actual facts’, though it could be argued that, depending on the speed and purpose for which the information was required, estimates may have a cost/benefit advantage over ‘actual facts’. Signalling a belief in the advantage of organic growth, Gill (1923: 331) suggested that a major problem of wartime intervention had been that cost systems imposed on certain industries from ‘outside’ were ‘not altogether a natural and, therefore, a sound growth’. Lawrence and Humphreys’ (1947: 33) later criticism of government cost investigators during both world wars pointed to their infatuation with the percentage on labour basis for recovering overheads, ‘even when the business under review has had a more advanced and more effective method in operation’. Lawrence and Humphreys (1947: 33) suggested that cost investigators had actually retarded progress by persuading some firms ‘to substitute the outworn percentage to labour for the better method in use’. Assessing the validity of the various views expressed about the impact of the First World War is a difficult task, not least because surveys of practice were not conducted at that time. Furthermore, the archival evidence of the last 25 years or so provides a somewhat patchy and limited picture of actual practice, though it does tend to suggest two things: fi rst, that cost calculation practices were more widespread before the First World War than believed by accounting and economic historians of previous generations; and, second, that within fi rms already utilising cost calculation practices, the war had little or no favourable impact on the systems used. More recent archival-based evidence therefore brings into question the claim of Loft (1986: 141) that ‘Manufacturers had costing forceably brought to their attention through government measures and, as result, the institution of cost accounting systems in manufacturing seems to have proceeded quickly’. This was probably so for some companies, but the growing weight of research fi ndings suggests they may have been in the minority. While changes to cost calculation methods can be clearly observed during the period of the war, such changes were more often part of an evolutionary process reflecting adjustments to long-term developments, rather than to the specific, short-term problems created by the war. This was certainly true of firms in the coal industry (Boyns and Wale 1996), and at the engineering company Hans Renold Ltd. (Boyns 2003). At other companies, such as British Xylonite and Ransomes, post-war comments by individuals intimately connected with the cost calculation processes stressed continuity

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with systems developed way back in the nineteenth century rather than of any major breaks created by war-time requirements. At Ransomes, J.B. Reeve, the chief of the Wages and Cost Department, claimed c.1923–24 that despite the changes made over the years ‘the methods designed nearly seventy years ago [by R.C. Ransome] are practically those which are in use to-day’ (Reading, TR RAN AD 3/11, ff. 102–03). Likewise, at British Xylonite, the company’s cost accountant, J.B. Rule, felt able to write, in 1936, following the introduction of a ‘modern cost accounting system’, that ‘It is pleasing to reflect that our present cost-accounting system, with all its analytical and calculating machinery, is the spiritual child of that system started by the late Mr. L.P. Merriam in 1879’ (Rule and Bennett 1936: 6).29 Given the varying extent to which cost calculation had permeated different industries before the war, and the differential impact of wartime controls on various sectors of the economy, it would not be surprising to find that the impact of such controls was variable. Studies of the coal industry, as already noted, do not suggest any changes in cost calculation methods employed, while evidence from engineering companies does not suggest any major impact on those companies which already had systems in existence (Boyns and Edwards 2007: 1002–11). In the chemical industry there is little archival evidence to support the view of Curtis that ‘During the past few years developments in the direction of more accurate and detailed costing work in chemical works has been rapid’ (1921: 175t). Indeed, two of the main developments cited by Curtis, process costing and the provision of comparative costs, already existed prior to the First World War in a number of leading chemical firms, including Brunner, Mond & Co. Ltd., United Alkali Co. Ltd., Albright & Wilson Ltd. and British Xylonite Co. Ltd. (Boyns, Matthews and Edwards 2004). A sector which felt the impact of government legislation more severely than any other was perhaps the iron and steel industry. Iron and steel works were taken under government control as from 8 November 1915, whereas coal mines, depending on their geographical location, remained under private control until late 1916/early 1917. For integrated coal, iron and steel producers like Bolckow, Vaughan & Co. Ltd., government intervention caused particular problems. At the company’s AGM held on 20 December 1916, Sir J.E. Johnson-Ferguson referred to the ‘arbitrary line’ that had been drawn through the middle of the company’s accounts as a result of part of the company’s business being controlled but the remainder not (Report of the Proceedings of the Ordinary General Meeting, 1916: 9). At the next AGM, Johnson-Ferguson further noted the disruption resulting from the collieries having been taken under control since 1 January 1917 (Report of the Proceedings of the Ordinary General Meeting, 1917: 18–19). Despite his protestations, the only impact of the legislation, both at Bolckow, Vaughan and similar companies such as Consett Iron, appears to have been the necessity to adjust the ‘price’ at which coal was transferred internally from the company’s pits to the iron and steel furnaces. Evidence relating to the cost calculation practices of those companies surveyed to date therefore provides little support for the view that the First

192 A History of Management Accounting World War had a major impact on either the cost estimating procedures used or the nature of cost statements produced. This suggests that the First World War may not have been, as previously suggested by many writers, a major discontinuity in the development of cost calculation practices.

4. CONTINUITY AND CHANGE In this section, we examine in more detail two specific issues which featured significantly during the period c.1870 to c.1918 and which illustrate our major themes of continuity and change. These are overheads and uniform (or standardised) costing.

4.1. Overhead Apportionment and Price Fixing Solomons (1952a) suggested that a major factor in the costing renaissance of the late nineteenth century was the need for price fixing in engineering concerns. If a business is to make a profit and survive in the long term, the price at which each item is sold must be sufficient to cover the total cost of its production, namely both the direct costs and the indirect (or overhead) expenses. As noted in Chapter 6, in multi-product, multi-process firms, determination of total product cost requires the identification and then apportionment of overheads, first to departments/cost centres and then to each product. In the absence of a consensus in the limited literature of the time, it is not surprising to find businesses in the late nineteenth and early twentieth centuries using a multitude of different terms to describe overheads: • ‘general expenses’ (Beyer, Peacock & Co. Ltd., railway locomotive makers, 1880s—Manchester Museum M0001/628; United Alkali, soda manufacturers, 1890s—Chester, DIC/X10/468); • ‘dead charges for oncosts’, ‘gross dead charges’ (G.E. Bellis & Co., engineers and boilermakers, late 1880s—Birmingham MS1708/305); • ‘dead expenses’ (BSA Ltd., gun manufacturers, early 1890s—Warwick MSS 19A); • ‘unclassified expenses’ (Nalder & Nalder, agricultural engineers, early 1900s—Reading TR NAL 382); • ‘outside charges’ (Winfield Rolling Mills, wire and tube manufacturer, early 1900s—Birmingham MS 332). The items included under such headings also varied markedly from firm to firm, in part depending on the precise definition of direct (or prime) costs applied. As noted in Section 2 above, two issues which gave rise to much debate in the literature were depreciation and imputed interest on the capital invested in the business. Surviving archival evidence for the period reviewed here suggests an increasing tendency to include depreciation in total product cost. Thus, in addition to firms in the iron and steel industry which had done

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so before 1870 (see Chapter 6), we can add to the list firms such as the greenhouse and metal window manufacturer, Henry Hope & Sons Ltd. (Birmingham MS 1056 Statements for 1902 onwards) and the Midlands iron chain and anchor manufacturers, N. Hingley & Sons Ltd. (Dudley, Hingleys Part 1/6—Half-yearly statement for Netherton Iron Works ‘Cost’, June 1913– December 1918). Although the costing methods employed in the National Chemical Factories during the First World War ignored depreciation (Chester BM 20/179, Lecture 3, ff. 2–3), C.F. Chance, of Chance & Hunt, reported its recognition in the accounts of his firm, as it was at several other chemical companies (Boyns, Matthews and Edwards 2004). The inclusion of imputed interest in product costs, however, was less widespread, although firms which did so include G.E. Bellis & Co. in the late 1880s (Birmingham MS 1708/319), BSA Ltd. in 1890 (Warwick MSS 19A/2/1/7) and the small agricultural engineering concern, the Wantage Engineering Co. Ltd. in 1900–01 (Reading TR WAN AC 5/1—‘Cost Summaries’ book: ff. 14–30). As in earlier periods (see Chapter 6), while we can often discover the amount of overhead apportioned to various departments/cost centres at different companies, the logic for the selected treatment is not always clear. At the United Alkali Co. Ltd. in the 1890s overheads (or ‘sundries’) included a proportion of district office expenses, but not of the Liverpool head office charges. The ‘Instructions for Preparing Works Cost Accounts’ indicated that the ‘amount to be debited monthly at each works, will be based on the previous half-year’s figures, care being taken to use too large a figure rather than too small a one’ (Chester DIC UA/31, ff. 8–9). The amount charged monthly to each works was then apportioned to the various departments according to a table of percentages, the precise figure varying according to the number of departments existing at the works, and therefore differed from works to works. These proportions, which were the same as those used for apportioning ‘repairs materials’ were in accordance with ‘the proportions settled by the District Manager and Work’s Manager’ (Chester DIC UA/31, ff. 4–5, 9). Elsewhere, just before the First World War, Hingleys apportioned head office and general charges to operating units ‘approximately in proportion to their Sales’, with two-thirds charged to the iron works (one-third each to Netherton and Old Hill) and one-third to the chain and anchor works (Dudley, Hingleys Part 1/2, Board meeting papers, fi nancial statements, letter from E. Bosley to G.C. Edwards, 6 April 1911). Reflecting comments (and criticisms) made in the literature, those overheads apportioned to departments/cost centres were often charged to products as a percentage on labour or prime costs. This was the case for estimated costs used for price fi xing in engineering fi rms such as Beyer, Peacock & Co. Ltd. (Manchester Museum M0001/628), the Coatbridge boilermakers, Thomas Hudson & Co. Ltd. (Glasgow UGD99/13/1), Nalder & Nalder (Reading TR NAL 382) and the Colchester-based agricultural engineers, R. Hunt & Co. Ltd. (Reading TR Hunt 553). It was claimed during the First World War that the use of a percentage on direct labour to cover overheads was the ‘most usual method of distribution’ (TNA BT55/21, f. 9).

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Indeed, when pricing material supplied to the government during the war, Ransomes multiplied the actual wages cost by three, that is, a mark-up of 200% on the labour cost (Reading, TR RAN AD2/2X: 20). In the early 1890s Mann (1891: 635) noted that overheads were often loaded on the combined figure for materials and labour, a practice that was utilised at BSA Ltd. before 1914 (Warwick MRC MSS 19A/2/1/8). More complex methods were also in use, such as that of R. Hunt & Co. Ltd., which determined the ‘cost price’ for two special coffee winnowers for J. Gordon & Co. in 1887 as follows (Reading TR Hunt 554—‘costing fi le’): materials labour 25% on direct labour for indirect labour 25% on total of previous items for establishment charges 25% on total labour for works charges + various charges depending on order (e.g. cost of pattern making, carriage, etc.) The Hunt method of piling percentages upon percentages was criticised by Preen (1907) as unscientific, but this company was certainly not alone in using this practice. A similar system was used during the First World War at the engineering fi rm Reavills, which costed Admiralty work as follows (Reading, TR RAN AD2/2X, f.20): Labour + 75% + materials to the sum of the above add 25% Establishment Charges & on to the total add 50% At Hans Renold Ltd. an even more complex method of overhead apportionment was introduced in the early 1900s by Church, his scientific machine rate system being referred to within the company as the expense rate system (for further details see Boyns 2003). Whatever the method of overhead apportionment chosen, the ‘accuracy’ of the resulting product cost figures depends on whether overheads are fully recovered and, moreover, whether they can be divided up in a logical manner. Achieving this outcome is no simple task for two reasons: first, the overheads to be incurred in an accounting period have to be estimated in advance; and, second, the level of output may differ from that anticipated. Changes to either the amount of overhead expenses or of output during the accounting period will render the pre-determined percentage or machine rate incorrect, leading to either an under- or over-recovery of overheads, and thence to incorrect product costs. For such reasons, firms such as at Nalder & Nalder Ltd. monitored the rates in use and, from time to time, adjusted the recovery rate on direct labour applied in the foundry shop (Reading TR NAL 382). Not only could rates change, but so too could the method of apportionment used, though it was not always the case that firms moved from simpler systems to

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more complex ones in the search for greater accuracy. R. Hunt & Co. Ltd., for example, switched in 1907 from the more complex system noted above to one of adding 100% on direct labour (Reading TR HUNT 553). Even complex systems, such as that of Church, could be found wanting, Hans Renold Ltd. finding that in the run up to the First World War their expense rate system was becoming increasingly unwieldy and throwing up figures which did not correctly recover overheads (Boyns 2003). The recognition of overheads as an issue in determining product cost provides a strong link to previous periods (see Chapter 5), while that of monitoring overhead recovery rates provides a clear link with subsequent periods (see Chapter 9). Other innovations between 1870 and 1918 which provided portents of significant developments to come include the more widespread use of budgets and standard costs, and the advent of uniform (standardised) costing. Budgetary control and standard costing will be studied in Chapter 9 while uniform costing is further examined in the next sub-section.

4.2. Uniform (Standardised) Costing Uniform or standardised costing, as it was sometimes described, involves the establishment of rules for the classification, calculation and presentation of costs in financial statements in order to improve their comparability. As Wheldon (1946: 6; emphasis in original) put it, ‘The Distinctive Feature of uniform systems of costing is the provision of detailed costs determined by the adoption of a standardised basis of cost analysis so that the costs revealed are properly comparable’. This accounting practice has numerous potential applications: to enable the management of a company to compare the results of different internal operations (e.g., of a number of factories producing the same products); to permit managers of different companies to compare their results (e.g., to help identify areas where there is scope for an improvement in efficiency); to provide companies in a particular industry with a mechanism for agreeing a common price structure; and to supply central government with data that can be used to inform economic planning decisions. Thus, uniform costing systems could be established by different entities for different purposes (Wheldon 1946: 6): by a central authority (e.g., company management or the state) for the purpose of executive or supervisory control; or by a trade federation or association to afford guidance in costing in a particular industry. At various times, these motives have played a role in raising the profile of the issue among businessmen and in placing it on the political agenda. The need for uniform costing systems within an individual fi rm increases with the number of plants operated, especially where these are geographically separated. Thus, in 1898, the South Durham Steel & Iron Co. Ltd. engaged W.B. Peat & Co., chartered accountants, to develop a scheme of uniform cost accounts for each of the company’s works (Matthews, Anderson and Edwards 1998: 115). When larger businesses were created through mergers, the nature of the merger could generate pressure for the adoption of a uniform system, with mergers where management was intent on

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moulding the previous entities into a single whole providing the greatest impetus for change. In loose-knit, holding company structures, the pressure could be less, thereby reducing the chances of successfully achieving uniformity. For example, United Alkali, formed in late 1890 as a merger of 40 companies (Kudo 1980: 80), found the task very difficult despite all of the concerns operating Leblanc soda plants, a feature which should have aided standardisation. After the First Word War the company’s Reconstruction Committee commented: ‘In the cost sheets for the six months ended 31 Dec. [1918] there is such a lack of uniformity in the compilation, and such obviously erroneous fi nal costs, that comparison and analysis are impossible’ (Chester DIC UA 3/6, minutes of meeting held on 8 June 1919). When several tobacco companies merged to form the Imperial Tobacco Co. Ltd. in 1901, attempts were made to impose the methods of the largest of the merged businesses, W.D. & H.O. Wills, across all former companies;30 a policy which took time to implement and proved not altogether successful (Alford 1973: 310). Elsewhere, dissemination worked better. Thus, when the south Wales coal company, the Powell Duffryn Steam Coal Co. Ltd., took over collieries in the early-twentieth century, it often standardised their cost sheets to the pattern it had been developing since the 1860s (Boyns 1993). However, where the acquired company retained a separate legal entity, Powell Duffryn usually allowed previous practices to continue. Possible explanations include recognition of different corporate cultures or a concern that attempts to generate change may have resulted in opposition from those who remained in managerial positions. One notable form of merger which occurred in Britain around the turn of the nineteenth century created combines which brought together a large number of fi rms under a single umbrella organization. While registered as limited companies, such organizations, especially in the textile fi nishing industry, 31 often acted in the manner of a trade association, although the nature of the management of such organizations varied considerably. Examples include the Bradford Dyers’ Association (1900, 21 fi rms) and the Calico Printers Association (1899, 45 fi rms) (Hannah 1983: 21). Such combinations differed in the extent to which they operated a system of centralised control. Payne (1967: 530) considered the Bradford Dyers’ Association to be well managed, Nelson (1926: 177) noting that it provided a uniform system of costing for all its branches. The Calico Printers Association on the other hand seems, at least initially, to have been less well managed. Hannah (1983: 74) notes that the company had 84 directors, 8 of whom were ‘managing’, resulting in leadership conflict and a board which was ‘too unwieldy to be effective’. The economist Alfred Marshall (1919: 606) commended the English Calico Printers Association on its efforts towards standardisation, but more recently Hannah (1983: 74) has suggested that ‘the introduction of standard costing systems and other methods of maintaining efficiency was often ignored’. Moving beyond hybrid organizations to pure trade associations, we find that the introduction of uniform costing systems can be traced to the 1890s.

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It is generally accepted that the first such scheme in Britain was that of the Birmingham iron bedstead trade under the tutelage of E. J. Smith, ‘a pioneer of uniform costing in Great Britain’ (Solomons 1952a: 18, 51). Writing at the time Smith was plying his trade, W. A. Addinsell, ACA (1899), in an address to the Birmingham Chartered Accountant Students’ Society, regaled his audience with tales of Smith’s exploits. Described as ‘the inventor of the plan’, Smith is credited with persuading ‘manufacturers of all sorts and sizes to sit together at one table and confide their dearly loved secrets to each other’ (Addinsell 1899: 577–578). The best-known scheme established before 1914 was that set up in the printing industry. Formed in 1901, the BFMP gradually developed a scheme, culminating in the publication in 1913 of a costing manual entitled The Printers’ Cost Finding System. While a leading article in The Accountant (8 March 1913: 330) considered that it was sensible for the system to be operated independently of the financial accounts, thereby enabling it to be introduced easily and quickly, a question mark was raised against the suggestion that ‘the accounting and the cost departments of a business’ should be separated. In their concluding paragraph, the leader writer urged those responsible for the publication to recognise that ‘they have not formulated a costing system at all; but only a system for estimating costs on a uniform basis’ (The Accountant, 8 March 1913: 332). Such criticisms may go some way to explain why the system was frequently revised and reissued over the next 50 or more years. Uniform costing systems clearly became more prevalent during the late nineteenth and early twentieth centuries, as mergers between fi rms and the formation of trade associations created larger organizations within which the use of common methods of cost calculation could be beneficial. Within large businesses, developments in information technology after the First World War (see Chapter 9, Section 2.3) made the use of uniform systems more feasible, but within trade associations and specific sectors of industry the pattern of post-war development varied. In some sectors, like printing, uniform systems continued well into the post–Second World War era, in others they developed anew between the two world wars or made little or no impact (Boyns 1998b; Most 1961; Solomons 1950). By 1970, for one reason or another, the external imposition of uniform costing systems appears to have been a thing of the past. Thus, while the external pressures encouraging conformity in fi rms’ costing systems varied over time, waxing in the late nineteenth and early twentieth centuries, peaking in the middle decades of the twentieth century and then waning thereafter, internal pressures within larger organizations, especially those created through mergers, nevertheless continued to exercise a role throughout the twentieth century.

5. CONCLUDING THOUGHTS ON THEORY AND PRACTICE Many commentators consider the late nineteenth and early twentieth centuries to be a period when costing practices were either little used or of a

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very poor quality and, moreover, that this situation persisted at least until the First World War brought the subject ‘into the light’. The blame for ‘backwardness’ is often laid at the door of businessmen who were reluctant to spend money on something they considered to be of little use. In his history of the English and Welsh chartered accountants, Stacey (1954: 98), for example, quotes the chairman of a limited company who informed the shareholders attending the company’s AGM in 1901 ‘that the preparation of cost sheets . . . had been advisedly abandoned . . . they cost the company £1,200 per annum, and even then were not accurate’. Stacey also noted that the auditor concurred with this viewpoint, adding that, in 50 years of experience, he had never found a cost book bring out the correct result. Such blanket condemnations of the pre-1914 cost calculation activities of British fi rms are no longer tenable. Careful examination of the contemporary literature and of the increasing number of studies of firms and sectors indicates that costing was far more widespread than previously thought. From 1870, accountants of all persuasions (chartered, incorporated and management), engineers, works managers, chartered secretaries and even academics contributed to the literature and debates surrounding cost calculation. A study of books and articles published between 1870 and 1918 reveals two different streams of development: first, one that built on pre-1870 accounting texts with an emphasis on how cost details could be incorporated within DEB systems through the use of subsidiary books; and, second, works whose central focus was on the methods of cost calculation. Authors of the latter literature sometimes discussed the issue of how cost figures could be reconciled with those from the financial accounting records or, indeed, how they should form part of a single integrated system. To be able to reconcile the cost and financial accounting figures was seen, especially by authors who were also accountants, as a key element in ensuring that cost figures were accurate or ‘true’. The accolade of accuracy required that the total profit (or loss) figure generated for the business as per the financial accounts was equal to the sum of the individual profit figures for each individual product, or each individual department, generated by the method of cost calculation used. While most authors considered that the main objective of cost accounts was to generate accurate product cost figures, whether for price fixing or other purposes, there were some who were beginning to doubt the efficacy of trying to apportion overhead expenses to departments/cost centres and then to individual products. This train of thought lead to a focus on the marginal cost approach which will be discussed in Chapter 9, Section 3. Although the amount of archival-based evidence remains less than we might like it to be, that which is available clearly indicates that a wide range of firms across the major sectors of the British economy were calculating costs prior to the First World War. While different firms, not only across industrial sectors but also within them, often did things their own way, within the leading sectors of the economy cost calculation was more advanced, often reflecting a mixture of competitive pressures and the complexity, and changing nature, of production techniques. Developments in management ideology and office

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(information) technology, together with public accountants supplying services that extended well beyond auditing, not least as advisers in setting up cost systems, also played a growing role, moreover one that expanded after 1918 (see Chapter 9, Section 2). Those firms that had introduced cost calculation systems before the war continued to operate them throughout the war, with any significant changes often reflecting long-term developments rather than a short-term response to war conditions. Given the lack of evidence of firms using cost systems for the first time during the period 1914 to 1918, we should be wary of claims that the First World War had a significant impact on cost calculation practices. As Gill (1923: 331) pointed out, government intervention did not always lead to a sound, natural development of cost calculation systems. While pre-war practices included techniques discussed in the literature, since there were some issues on which authors of the period disagreed, for example imputed interest on capital and depreciation, business practices inevitably varied between firms. Perhaps not surprisingly, some of the early literature (e.g., Walker 1875; Norton 1889) was based on the description, or synthesis, of existing practices, although it is clear that in certain industries, such as chemicals, the accounting procedures in some firms were in advance of both the literature and the practices implemented during the war at the specially established National Factories (Boyns, Matthews and Edwards 2004). While many of the texts of the period were designed to provide practical guidance to those wishing to develop systems for determining their costs, indicating a perceived ready market for such works, one or two of them, starting with Garcke and Fells (1887), were concerned to address theoretical as well as technical issues. Thus there is evidence of a trend towards a scientification of the literature, a process which became more apparent after 1918, especially concerning the desire and attempts of those engaged in cost calculation activities to achieve an enhanced status by having their work recognised as ‘professional’. We turn our attention to this issue in Chapter 8 before discussing post-1918 developments in techniques, tools and practices in Chapter 9. Appendix 7.1 G.P. Norton’s Use of Standards or ‘Trade Prices’ In his text, Textile Manufacturers’ Book-Keeping for the Counting House, Mill and Warehouse . . . (1889), George Pepler Norton presented a set of departmental accounts for a single mill comprising a number of departments in which were carried out separate processes of manufacture: woollen carding and spinning; worsted combing and spinning; weaving; dyeing; finishing; and pattern making. The accounts, spread over three pages (194–196) are reproduced below. On pages 194–195 is given a single ‘Manufacturing Account’, in two sections, in standard DEB format. On the debit side of Section I we find details of the opening stock, material expenses, certain other expenses, and the ‘value of work’ done in each of the first five departments, no figure being given for ‘pattern making’. The ‘value of work’ of the five departments

200 A History of Management Accounting is calculated on the basis of standard or ‘trade prices’, Norton (1889: 222, note w) noting that ‘There is a well-known trade price for almost every process of manufacture (i.e., a price at which goods can be put out to work). In Yorkshire the term country work prices will be understood’. The trade prices are, in effect, standard ‘non-material’ costs, this no doubt being the reason why Solomons (1952: 39) felt able to claim that this was ‘the nearest that the nineteenth century came to standard costing as we know it’. Thus the ‘value of work’ represents how much the work carried out in the mill would have cost if these activities had been carried out under the putting-out system. Section II of the Manufacturing Account provides a breakdown of the ‘Net Profit as per Trading Account’ on the debit side and, on the credit side, a breakdown of this profit into ‘Gross Selling Profit from Section I’ and figures for each department, with the exception of pattern-making, indicating ‘Profit on Departments’. The departmental profit figures shown in Section II are the difference between the value of the work done in each department, valued at trade prices as shown in Section I of the Manufacturing Account, and the ‘wages and expenses’ of each department as shown in the ‘Analysis of Dr. side of the Trading Account’ featured on page 196. The ‘wages and expenses’ of each department represent the labour costs plus certain mill overheads (including depreciation of plant and machinery) but not the ‘standing expenses’ of the warehouse or general office, or ‘general charges’. The departmental ‘profit’ indicated in Section II of the Manufacturing Account is therefore the gain from carrying out that process within the mill, rather than having the work done externally (as under the putting-out system). Thus, by internalising all activities an extra profit of £4,060 has resulted, with the contribution from each activity separately identified. What the account does not show, however, is the profit that would be made by discontinuing entirely one or more activities, for example whether the company would make a profit of more than £14,992 by selling the textiles at some stage partly manufactured. One reason for this is that Norton (1889: 220) did not favour attempting to track the profit made at each stage of manufacture through the use of appropriate transfer prices (see Chapter 6): ‘it is impracticable, as well as useless, to charge each successive department with the value of the goods supplied to it from other departments’. The method outlined in Norton’s example, in which ‘The foreman of each department keeps a record of work done in the processes under his supervision, and the profit or loss is ascertained by comparing in each case the value of such work done, when calculated at trade prices (note w, p. 222), with the proportion of wages and expenses chargeable against the respective department’, was considered by Norton to be the ‘only plan which is thoroughly workable and satisfactory’ (1889: 220). Thus, Norton’s method is incapable of providing a departmental breakdown of the total ‘Net Profit as per Trading Account’; indeed, in his example, the departmental profit figures shown in Section II of the Manufacturing Account only account for 40% of the ‘Net Profit as per Trading Account’.

The Second Second Industrial Industrial Revolution, Revolution, c.1870–c.1918 c.1870-c.1918

DEPARTMENTAL ACCOUNTS. Set II,-Continned.

194

Dr. 1884 Jan. Dec.

201

1 31

Manufacturing Account, To „ „ „ „

83683 12 11 7 36969 15 5261 3 11 225 17 5 942 14 3

Stock on h a n d Material Outwork Packing Materials Carriage

77083 1337

P a t t e r n Making (cost exclusive of Material)

4 3

1 1

PROCESSES OF MANUFACTURE, at Trade Prices, viz.:— Woollen Spinning Department Condensing and Spinning Twisting Winding