Managerial Accounting Assignment

INDEPENDENT UNIVERSITY, BANGLADESH

MBA 513: MANAGEMENT ACCOUNTING

ASSIGNMENT ON

THE HISTORICAL DEVELOPMENT OF MANAGEMENT ACCOUNTING

Submitted to: Mr. Mahfuzul Hoque Ph.D

IMPORTANCE OF LITERATURE REGARDING THE HISTORICAL DEVELOPMENT OF

MANAGEMENT ACCOUNTING

A wealth of literature exists regarding the historical development of management accounting and accountants have many reasons to study this literature.

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

It enables one to support proposal with past writings. Quoting from an important work in management accounting can help sell a proposal or give credence to an idea.

IMPORTANCE OF LITERATURE REGARDING THE HISTORICAL DEVELOPMENT OF MANAGEMENT

ACCOUNTING

As with study of any literature, it provides accountants with opportunities to improve their verbal abilities, both written and oral.

It familiarize accountants with the intellectuals and innovators who have shaped how accounts proactive their profession.

It illustrate the state of the professionalism of the field.

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

HISTORICAL DEVELOPMENT OF MANAGERIAL ACCOUNTING

Even though one can not find the first management accountant or the first signs of the field, there is a consensus regarding the monumental importance of the first printed treatise on accounting by Luca Pacioli in 1494.

PACIOLI AND THE RENAISSANCE

1200s: The first vestiges of double-entry accounting came from various Italian city states at about the very end of the 1200. The first printed text of accounting came out of this period

1494: Luca treatise on Double entry accounting or “The Method of Venice” as practitioner have nicknamed it, described a method of accounting that bankers and merchants had practiced in the Italian city states for about 200 years. His text book “Summa de Arithmetica, geometica, proportioni et proportionalita” was the leading mathematics textbook in Italy for many years.

DOUBLE ENTRY SYSTEM

Double entry system popularized by Pacioli and those who copied the ideas in his treatise to develop similar works throughout Europe, allowed a much better way to visualize immediately the results of operation.

“THE METHOD OF VENICE”

Pacioli stressed the importance of owner’s involvement into the recordkeeping activities of the organization.

He said, “the merchant can be said to be like a cock which of all animals is the most vigilant, and in winter and summer keeps his nocturnal watch and never rests…and a merchant’s head may be compared to one with a hundred eyes which nevertheless are not sufficient for him in word or in deed.”

“THE METHOD OF VENICE”

It gave the concept of profit or loss arising from various inventory items or various ventures or both.

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

It was merchant oriented not manufacturing.

INDUSTRIAL REVOLUTION AND MANAGEMENT ACCOUNTING

Industrial revolution led to an increase of the scale of business. The changeover from agrarian and handicraft economy to a machine-based economy.

Recent interest in the history of management accounting has led to a number of studies of British and French firms between 1750 and 1850.

The Carron company and the Boulton and Watt company offer two examples of companies in which management accounting played an important role.

The beginning of the industrial revolution called for another extension of accounting into a manufacturing environment


The Carron company:

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

Used many management accounting techniques: Expense control Responsibility management.* Product costing Overhead allocation Cost comparison* Cost for special decisions Budgets Forecasts Standards* And inventory control

In those starred (*) techniques the Carron company showed superior management


The Carron company:

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

The company increased the amount of overhead it allocated to product.


Boulton and Watt: (This company manufactured the steam engine.)

The founder James Watt. Jr and Matthew Robinson Boulton became pioneer in cost management.

They used all the Carron techniques except for overhead allocation.

Their methods show superior cost management regarding

Expense Control; Responsibility Management Product Costing Cost Comparison Budget Forecast Standards Time studies and piecework system

It did not have a good handle on overhead or on integration of its cost records with the general ledger, it did articulate material and labor standards in an acceptable manner.


Robert Hamilton: (Rector of Perth Academy, chairman of Natural Philosophy at the university of Aberdeen, 1817)

He realized the necessity for complex manufacturing firms to break out of the mechanical accounting model.

He included such topics as transfer pricing Joint costs Calculation of the rate of return Residual income

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

Give a good grasp of overhead, including wear and tear on tolls and depreciation of furnace


Charles Babbage: ( Father of the computer) Though he was not accountants but contributed to the field.He favored the result of a fair day’s work, a precursor of

standard costing. Babbage urged the manufacturer to have a good notion of

what costs should be before measuring them.He recommended that the name of the work-man be noted on

his efforts. He espoused Adam smith’s notion of the superiority of

speicialization in the division of labor.He called for a measurement of the wear and tear on

machinery, so that companies could make cost comparison to discover lower cost method of accomplishing a task.


Continuation…

Babbage noted the importance of operating machinery 24 hours a day, to maximize output from such expensive capital investments.

Landner’s book: Railway Economy 1855Lardner thought that a company should know the cost of each

class of object transported.

He argued past data would prove useful for furniture predictions.

He illustrated different calculation of management accounting by the end of the first of the nineteenth century.

ERA ENGINEERING AND SCIENTIFIC MANAGEMENT

1880-1920,

engineers dominated the progression of management were the prime movers of the scientific management movement.

1885,

Captain Henry Metcalfe an American Army wrote the first modern book on management accounting, The cost of manufacturers and the administration of workshops.

The system required that the workman note the time he spent on each job on a separate labor card, filed by job number.

ERA ENGINEERING AND SCIENTIFIC MANAGEMENT

1887, Emile Garcke English electrical engineer and John

Manger fells an accountant published Factory Account : Their principles and practice. They presented a tightly integrated system for prime cost, which featured perpetual inventory and a job order system.

Many still recognize Frederick Winslow Taylor is called the father of scientific management. Basically Taylor published his two classics, the principles of scientific management and shop management.

ALEXANDER HAMILTON CHURCH

Alexander Hamilton Church the most influential figure of the early twentieth century.

He mainly introduced the manufacturing overhead and the activity-based casting.

Church published in 1909, a six article series in the Engineering Magazine, which became the 1910 book Production Factors in Cost Accounting.

Church also discussed accounting for waste and he fully developed the machine hour-rate method.

ALEXANDER HAMILTON CHURCH

In 1930, Church published Overhead Expenses : In relation to casts, sales and profits.

Church contributed to the field of management as well as accounting.

Church authored innovative and successful ideas regarding many facets of management. He placed accounting into the dynamics of management.

PROFESSIONAL INSTITUTIONS

The most two significant institutions that have provided research for management.

The national Association of cost Accountants (NACA), in the United Kingdom And the another one is the Institute of Cost Accountants, in the United Kingdom.

The NACA became the National Association of Accountants (NAA) in 1957 and then the Institute of management Accountants (IMA) in 1991.

The Institute of Cost Accountants was renamed the Institute of Cost and work Accountants in 1972, became the Institute of Cost and management Accountants in 1986, It became the Chartered institute of Management Account.

STANDARD COST:

Its main purpose is continuous improvements in quality and cost control. The standard cost is a complex system of reporting a product and its unit basis cost experimentation in right way through some rules and accounting system. It’s included each and every unit direct, indirect and provision cost. By summing these component a product cost (through computing all the possible unit cost) become appears that shows the probability of selling price. Before selling, accountants or standard costing experts should have to prove the cost of a product and it’s each and every unit. To do this standard costing experts have struggled with several issue. But, they are pretty much able to overcome these problems.

STANDARD COSTS Standard Costs has meant a compilation of those things should cost

a means of reporting deviations from the normative amounts, and a mechanism for deciding when deviation require attention.

1921 G, Charter Harrison is the father of Standard Costing- felt the

accountant should hold the dominant position among FW Taylor or Harrington Emerson.

1930 Harrison Eric A and Cecil Gillespie had written explicit how to

textbooks. With the first edition of Standard cost for manufacturing

1947-1960 Stanley Henrici became the leading writer on this topic. He

introduced the concept of super standard for management, rather than for supervision use.

STANDARD COSTS

1964 Zenon S. Zannotos stressed the need for a more

advanced probabilistic approach. 1975

Robert S. Carnegie: Reviewed several academic studies to help accounts understand statistical procedure.

1987 Peter Miller and Ted O’ Leary used a behaviorist

approach to criticize standard costing stressing that it reflected the imposition of the power of the firm on its workers.

STANDARD COSTS

1989 Michihauru Sakurai and Philip Y Huang carried out a study

that noted that Japan used standard costing for financial accounting purpose and Japanese developed the target costing technique, which controls cost at the design stage.

Another study indicated dissatisfaction with standard costing from a just in time viewpoint. William Mosconi and Thimaas Norris (Former coopers and Lybrand) found that a firm could better attain the JIT goal of continuous improvement by using a rolling average of job costs than by an inflexible standard costing system.

UNIFORMITY AND WORLD WAR I:

During the war time manufacturing goods condition was not good. The war effect was on the industrial product. So, the national governments attempted to cost control. One way to exert cost control was to establish uniform accounting system in industry. Uniformity refers to restrict some cost boundaries through a structure. This type of accounting system was also used in cost plus pricing agreements.

J. M CLARK’S STUDIES IN THE ECONOMICS OF OVERHEAD COSTS

J. M CLARK runs a study on the economics overhead costs. One of his major contributions to accounting is the four logical bases on which to apportion overhead: (a) ability to pay; (b) causal responsibility; (c) benefit or use; (d) stimulus to more cost effective use by charging the cost against a cost object where the responsible party has the opportunity to reduce costs. Another lasting contribution has been his notion of different costs for different purpose. Perhaps the most effective way to illustrate the scope of Clark’s text is to show its table of contents.

DISTRIBUTION COST AND ITS SUPPLY CHAIN MANAGEMENT:

1925 Herbert Hoover’s: Hoovers listed 15 kinds of waste in a national

distribution conference three of which pertained to the distribution cost issues,

Waste from unnecessary multiplication of terms sizes and varieties

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

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

1930Haward C. Greer, a writer for 5 decades stressed that cost

accountants must give the same attention to distribution costs that they give to production cost. Allocating distribution costs by commodities, territories, customers and so forth required imagination.

DISTRIBUTION COST AND ITS SUPPLY CHAIN MANAGEMENT:

1936 The Pollster A.C. Nielsen stressed the importance of customer sales- which

included distribution costs- rather than factory sales.

1938 Charles Reitell suggested that distribution costs use standard costing techniques,

thus exchanging precision for guesswork.

1953 Heckert and Miner’s book contained a series of lists, including a list of 43

items of distribution data that firm should collect.

1955 Longmand and Schiff discussed 35 possible actions to reduce losses in

processing small orders.

DIRECT COSTING:

The major part of a product is covered by direct cost. Direct costing is a standard costing which is related from manufacturing to finished goods. To calculate direct costing accountants need managerial information. Direct costing is under manufacturing overhead cost and its have major impact in production and its profitability. In the twenty century direct costing practices had began and now it is the main decidable things of an industry success or failure. When a company has an inventory their profits automatically increase. It refers inventory includes direct materials, direct labor and manufacturing overhead.

CAPLAN’S MANAGEMENT ACCOUNTING AND BEHAVIORAL SCIENCE

A number of accounting researchers started in the 1960s. its extended the traditional field of management accounting by introducing findings from behavioral school of management. Caplans tested the traditional view of motivation by economic reward. He warned that a tight control system may prove counter-productive because it could foster negative attitude toward the company and the fear of motivations. He developed the traditional management accounting model into four parts assumption about organizational goals, assumptions about the behavior of participants, assumptions about the behavior of management, assumptions about the role of management accounting.

SOLOMONS’S DIVISIONAL PERFORMANCE: MEASUREMENT AND

CONTROL

David solomons received a research grant in 1961 from the financial executive research foundations to study how to optimize performance of divisions within large corporations.

JOHNSON AND KAPLAN’S RELEVANCE LOST

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

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Managerial Accounting Assignment