The Emergence of Management Accounting

Management accounting Opens in new window has emerged in parallel with the adaptation of the organization to its environment.

While management accounting procedures can be traced to medieval times or earlier, the Industrial Revolution beginning in the late 1700s marked a turning point in their development.

The Industrial Revolution and subsequent decades changed the nature of organizations. These changes required new methods for planning and control.

For example, in the eighteenth century, Josiah Wedgwood was motivated by dynamic economic and market conditions to re-examine his business methods.

He began to use cost data to calculate production expenses, evaluate economies of scale, and to control worker performance at his pottery works.

In the nineteenth century, management accounting became more important as firms confronted environmental factors little different from those faced today: technological change, competition, and customer tastes.

Technological change Opens in new window, such as improved communications and transportation networks, shortened operating cycles and decision-making horizons. Technological innovations intensified competition, as customers grew accustomed to the availability of cheaper, mass-produced goods.

Organizations were increasing the size and scope of their operations. Most business firms were small and operated by family members or by a small ownership group.

But as firms grew larger to take advantage of new and costly technology, such as steam engines, families did not have the necessary capital to make the investments. Many turned to outside investors and professional managers.

The delegation of decision making to managerial employees meant changes in management and operating methods, as organizations dealt with the differing interests of shareholders, managers, and workers.

Many early management accounting techniques were refined and adapted in the nineteenth and early-twentieth centuries.

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British textile and iron mills grew by combining the various processes for cloth and iron production, often integrating vertically to reap the benefits from economies of scale.

For example, Boulton and Watts combined operations to reduce its reliance on sub-contractors in the manufacture of steam engines. Operating departments were treated as separate entities and evaluated in a manner similar to profit centers.

These data allowed managers to compare the cost of conducting a process inside the firm versus purchasing the process from external vendors.

The growth of railroads and the rise of steel production encouraged the development of costing systems to report production yield (inputs per ton of output), the cost impact of changes in input mix, and production methods, along with the return on capital invested.

Retailers also adapted accounting techniques to control operations in a growing mass market.

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H. G. Selfridge opened his London store in 1909 after amassing a personal fortune in the US merchandising sector. Selfridge adapted the methods of US merchandisers such as Marshall Field’s where he had worked and risen to the executive ranks. These methods include gross-margin (revenues less Cost of Goods Sold) and stock-turn ratios (sales divided by inventory) used to measure and evaluate performance.

US firms such as Du Pont Powder Company and General Motors devised innovative performance measures to control their growing organizations. US developments also reflected the fact that multi-divisional firms had to manage activities over greater distances compared to their counterparts in the UK and Europe where organizations were not as geographically dispersed.

In the twentieth century, management accounting was heavily influenced by external considerations.

Government intervention and wartime economies affected management accounting techniques and systems, as firms adapted to production shortages and changes in market demand.

Many organizations developed their management accounting in parallel with their engineering and production systems. Income taxes and financial accounting requirements frequently took precedence over management accounting.

In recent decades, the impact of rapid technological change, completion and globalization, and customer preferences has caused managers to question whether many current management accounting procedures are still appropriate.

In order to succeed, the organization must implement an appropriate strategy supported by an appropriate management accounting system.

Therefore, changes in management accounting reflect the firm’s strategic efforts to create organization value.

The history of management accounting illustrates its emergence and adaptation in response to changing organizational circumstances.

Management accounting provides information for planning decisions and control.

It is useful assigning responsibilities, measuring performance, and determining rewards for individuals within the organization. As other parts of the organizational structure adapt and change, it is not surprising that management accounting evolves in a parallel and supportive fashion.