Management Accounting

Retrospect and Prospect

Al Bhimani, Michael Bromwich

• Publisher: CIMA Publishing
• Year: 2009
• Print ISBN: 9781856179058
• eBook ISBN: 9781856179065
• Topic: Business
• Subtopic: Accounting
• Index: Business

Management Accounting is part of the celebrations to mark CIMA's 90th anniversary in 2009. It looks at the development of cost and management accounting from the founding of the Institute to today. It considers a number of immediate challenges to management accountants and surveys a range of issues and challenges that will likely affect management accounting thought and practice in the future. The authors examine the possibilities for accountants to widen their focus and become more familiar with the enterprise technology determining their organisations' cost structures and with the effects of multiple production in various locations, such as economies or diseconomies of scale. Such change may require the alteration of traditional cost models used by accountants to become more nuanced. The book suggests how this may be accomplished and highlights the need for management accountants to work as part of management teams throughout the organisation as business partners rather than remain grounded in specialist information provision roles. Alnoor Bhimani is Professor of Management Accounting at the London School of Economics. He is also a Certified Management Accountant as well as an author of 15 books and over 100 articles. Michael Bromwich was CIMA's Professor of Accounting and Financial Management at the London School of Economics and Political Science (1985 to 2006), now Emeritus. He is a Past President of CIMA (1987/88) and currently serves on CIMA's Technical Committee. - A unique survey of 90 years of CIMA research - Analyses the research to determine future challenges for management accounting and business practices - Charts the history of management accountancy and business practice over nearly 100 years

Chapter 1. Management Accounting:

Past and Present

1.1. Introduction

Most techniques currently used in management accounting have distant origins. An understanding of their roots is useful in appreciating their deployment today. The first section of this chapter briefly investigates the development of cost accounting to the time of the founding in 1919 of the Institute of Cost and Works Accountants (ICWA) which evolved into the Institute of Cost and Management Accountants (ICMA, 1972) and in 1986 into CIMA. The chapter then tracks the development of cost accounting and management accounting from then to the present. Finally, the chapter considers the current state of management accounting and some of its practices.

There are different arguments for considering the past. One might suggest that management accounting has evolved and progressed over a historical time frame, essentially becoming more adept at confronting costing challenges. But such a view would presume the field’s pursuit of betterment toward some ideal state and the existence of a pre-existing conceptual framework awaiting discovery. This is a problematic stance as management accounting would then seem to be capable of moving towards closure of some sort, for which no conclusive argument has ever been produced. A more viable approach is to understand the changes faced by management accounting and its response in the light of continuous change. This view proffers an understanding of the field’s strategic posture under different circumstances. It permits assessments of its theoretical underpinnings as well as the practical changes it has undergone and which caused it to change. Such a perspective allows us to discuss technical and practical aspects of management accounting mechanisms from the vantage point of theoretical interests in their logic and structure. It also permits us to consider the field’s reactions and potential changes as it faces an emerging future in the context of modern day globalisation effects, digitisation and technological advances, concerns with risk management, governance and sustainability and wider forces in evidence across markets, geographical borders and economic and social terrains.

1.2. Cost Accounting and Management Accounting: Then and Now

We do not intend to review the history of management accounting in great detail here; for this, see Edwards and Boyns (2006) and Fleischmann and Tyson (2006) which provide extensive descriptions of the early historical development of cost accounting in the UK and USA. These articles, and other research, indicate that much of this history is contestable because of sparse records and the continuing discovery of new sources of information. Many studies also suggest that market pressures and changes in management structures drove firms to develop certain specific internal accounting procedures (Chandler and Daems, 1979; Johnson, 1983). But there is evidence and arguments that accounting practices have much wider and more dissipated origins (Baxter and Chua, 2006; Bhimani, 1996; Hopwood and Miller, 1994; Miller and O’Leary, 1987).

1.2.1. Costing Then

The early history of accounting within the firm from the 1840s to approximately 1910 firstly involves predominantly bookkeeping for costs and for revenues, with a major purpose being the valuation of inventories for financial accounting purposes. Secondly, and secondarily, it involves the seeking of more sophisticated product costs and more accurately costed jobs, batches and orders. These developments tended to be the province not of accountants but engineers, and those accountants who were involved were financial accountants. Everyday costing was the province of a large army of unqualified clerks.

The most important accounting book on costing in the last quarter of the 19th century was an English book by Garcke and Fells, Factory Accounts: Their Principles and Practice (1887, with a large number of subsequent editions). ¹ A good majority of their book addressed bookkeeping for costs and urged the integration of cost accounts with the financial accounting system, but their understanding of costs was surprisingly modern. For example, they discussed accounting for prime cost (labour and material) and accounting to provide accurate costs for pricing. They recognised the importance of the distinction between fixed costs and costs that are variable with output. They attributed those overheads to products that were believed to vary with production, including depreciation and supervisory costs but not fixed costs such as general administrative costs. This understanding of ‘modern’ fixed and variable costs supported early advocacy of the ‘break-even’ chart (Hess, 1903). There is, however, little evidence that such costs were used for cost control or performance measurement.

¹Garcke was a working electrical engineer and company chairman. John Fells was a financial accountant who also worked in industry and became an adviser to many firms on keeping internal accounts.

These two strands – cost bookkeeping, including inventory valuation, and costing for pricing – later formed the core of cost accounting. However, these ‘modern’ views were not generally taken up by industry. Arbitrary rules of thumb for accounting, mainly for prime costs, predominated.

Concurrently with the introduction of new technologies, a variety of new methods of attaching overheads to prime costs emerged from around the 1880s, with the machine hour rate gaining acceptance between 1900 and 1910. This system had an impact on practice. The allocation of overheads, although general practice then as it is today, had its contemporary critics – this criticism mainly being that it is market prices rather than accounting numbers which matter in decision making, and that any allocation of overheads is arbitrary. Both of these criticisms are still believed by some to apply today, but practice overwhelmingly continues to use overhead allocation (Dugdale et al., 2006) even though research consistently suggests that overhead allocation cannot be other than arbitrary (Thomas, 1969, 1974).

A conflict of views surrounds the causes of the birth of ICWA in 1919 and the effect of the First World War (1914–1918) on its founding and on costing more generally. One view is that the War produced forces and conditions which led to the professionalisation of expertise relating to costing practice. There existed strong backing and enforcement by the government for verifiable costing because prices had to be based on costs (Loft, 1990). The War thus sponsored the emergence of professionalised costing expertise. Other research, however, suggests that costing was practised widely across firms and industries prior to the War (Edwards and Boyns, 2006). This is not to deny that the War had a profound effect on the cost accounting profession. According to Loft (1990) the wide distribution of costing during the War and its continuing role in moderating inflation post-War created a suitable foundation for the formation of the ICWA² which she describes as the ‘coming into the light of cost accounting’.

²Originally titled the Institute of Cost Accountants Ltd but quickly changed to ICWA in order to avoid the Institute’s designatory letters conflicting with the then Institute of Chartered Accountants.

In the UK there was a wish among cost accountants to continue to enjoy the freedom gained from the dominance of financial accounting and auditing during the War. It was felt that the financial accounting bodies did little to encourage cost accounting and probably saw it as beneath the station of ‘professional’ accountants. The founders of the ICWA sought to make cost accounting fully professional, by providing education and examinations (not compulsory originally) and by seeking to make costing scientific. This was one of two objectives stated in CIMA’s charter granted in 1976.

The scope of cost accounting around the time of the creation of ICWA is suggested by looking at the relatively few textbooks available at that time. One contemporary American book is Cost Accounting: Principles and Practice, published in 1920 (Jordan and Harris, 1920). Their concern with the then lack of progress in cost accounting, and the promise they saw it offering contemporary American industry, is well expressed as follows:

Hardly any other feature of industrial procedure has been so necessary, yet so slow in developing, as cost accounting – so rich in possibilities of usefulness for management of business, yet so widely considered for many years as a doubtfully necessary evil. (p. iii)

The book is largely concerned with the details of setting up a ‘proper’ cost system for each functional cost, thus purchasing and receiving goods were seen to require:

■ records of transportation charges, stocks and material usage,

■ the pricing of requisitions and

■ the calculation of minimum and maximum quantities of orders.

Although at that time much of industry used rudimentary accounting systems rather than the leading edge systems suggested in the book, much of its content indicates early concerns with some of today’s problems.

Cost accounting was then seen to concern not just pricing and inventory valuation but also cost control, but nevertheless this was in terms only of keeping accurate records, not generally in terms of comparison with plans. Standards are mentioned in the book, but only relative to the level of capacity usage that should be used when costs are to be estimated for pricing purposes.

Several chapters consider overhead allocation. They advocated department overhead rates using different rates within each department to try to capture the correlation between costs and activity usage, because of their believed greater accuracy relative to other methods. They also advocated the use of under- and over-absorption of overheads to deal with the variability of production, with non-recovered overheads being charged not to manufacturing cost (which was the general practice) but to the profit and loss account. Of course, from a research perspective at least, most of this would be regarded as irrelevant to decision making, control and performance measurement.

At the time of the foundation of what was to become CIMA, internal accounting focused on transactional accounting. The incorporation of mainline subjects, such as standard costs, budgetary control, performance measurement and costs for decision making, occurred subsequently within management accounting over a 90-year trajectory. The next section demonstrates this evolution by charting very briefly the development of cost accounting and management accounting from 1919 until the present time. Such a focus is important in understanding today’s use of these techniques.

1.3. The Path to Today’s Cost Accounting and Management Accounting

The pattern and timing of changes in cost accounting and management accounting from just after the First World War until the 1950s often seem to differ between the US and the UK (see Edwards and Boyns, 2006; Fleischmann and Tyson, 2006), with the US being the more experimental.

The first use of the title ‘management accounting’ seems to be by Robert Anthony in 1956 for the title of his American book Management Accounting: text and cases (Anthony, 1956; see also Horngren, 1962). Naturally, elements of management accounting were used earlier by some (mainly large) firms, and most of the techniques and methods which form the foundation of today’s management accounting were in existence by the mid-1960s.

To illustrate the development of management accounting, the next sections look at the growth of three foundational elements of management accounting: standard costing, budgeting and capital budgeting.

1.3.1. Standard Costing

In the UK, fully-fledged systems of standard costing including variance analysis were first advocated in books from around the late 1920s, with some firms using such systems a little earlier. Publications on standard costing in the US appeared in the early years of the 20th century and it was quickly implemented by large firms, aided by the spread of scientific management techniques (see section 1.3.2 below).

1.3.2. Budgeting

The first UK text in the area of budgeting was published in 1931 (Willsmore, 1931), emphasising the need to compare plans with actual results. Around this time, a number of famous British companies such as Dunlop, Austin Motors, Cadbury and Pilkington Brothers pract...

Table of contents

• Cover image
• Table of Contents
• Copyright
• Preface
• Acknowledgements
• About the Authors
• Executive Summary
• Chapter 1. Management Accounting:
• Chapter 2. Costs
• Chapter 3. Flexible Technologies, Fluid Organisations and Digitisation
• Chapter 4. Cost Co-creation and Globalisation
• Chapter 5. The Rising Tide of Change in Management Accounting
• References
• Index