Introduction
The origins of various components of bookkeeping are aspects that have evaded scholars and economists overtime. It is not very clear on when the issue of cost accounting started to be used by various business people. The literature on the issue suggests that attempts to manufacture accounts can be traced to as early as the 16th century. As time went on, the accounting practices became more complex. This paper seeks to trace the development of the concept of cost accounting by first having a clear conceptualization of the field and then looking at the advances that have been made over time.
Defining cost accounting
Cost accountancy refers to the process of applying the concepts of costing and cost accounting to and the ascertainment of profits. The information derived from the process s is then used during decision making by management. Cost accounting can be viewed from different perspectives. First is the perspective of cost accounting as a form of knowledge and, therefore, a discipline by itself. As a discipline, it has its set of concepts and principles that differ from industry to the other. Cost accounting can also be seen as a science, where it appears to be a concept made up of systematic knowledge, which brings together various disciplines such as law, organization procedures and financial accounts. Cost accounting can also be seen as art, where abilities and skills are required to apply the various concepts that define the discipline (Boyns & Edwards, 2013). In the modern day business world, cost accounting has also been conceptualized as a profession, whereby various bodies have been established to offer professional insights on different aspects of this discipline.
Need for cost accounting
The constant evolution of cost accounting can be attributed to diverse needs within the business environment that necessitate the formation of such a discipline. The first need that cost accounting seeks to satisfy is overcoming the myriad of limitations in ordinary financial accounts. Unlike financial accounts that offer past data, cost accounting provides more recent data that is beneficial and needed by the management. Besides, financial accounts only reveal the overall outcomes of business, a limitation that cost accounting corrects by providing data for specified products processes or departments. The financial accounts have also been observed to be static in nature, which does not represent the state of modern business. Cost accounting is similar to the modern da business since it reflect the same form of dynamism. Another limitation seen in financial accounting is the potential of manipulation. This restriction is dealt with in cost accounting since the avenues for manipulation are considerably reduced (Chakraborty, 2004).
Another need that has historically necessitated cost accounting is the desire to utilize optimally resources. In the simplest definition, measuring the value of input against the value of the outputs is the surest way through which optimum use of resources is achieved. This makes cost accounting necessary. Another need of achieving overall efficiency in various business processes also necessitated the creation of cost accounting. By being efficient in every business process, a businessperson can maximize and improve the outcomes of the enterprise. Through cost accounting questions on aspects such as the potential of profitability of a company, most profitable products and the variation of production costs are adequately answered (Chakraborty, 2004).
The Medieval Era
Historical data reveals that the Medieval Era saw the start of application or use of the concept of industrial accounting. Scholars point out that the fist accounting book was authored by an Italian named Lucas Paciolo in 1496, and that was the first time that bookkeeping was introduced to the human society. There are however arguments that bookkeeping had started earlier before the publication of this book, especially by merchants who conducted trade in the Middle East Africa and parts of Europe. Besides, the introduction of the Arabic numerals in the 13th century is also viewed as the first time that cost accounting was used. The consensus, however, is that the growth of businesses during this period necessitated the use of accounts, albeit at a very simplistic manner.
There are many examples of the accounting practices that were used during the Medieval Era. An example here is the application of Del Bene Firm Accounts in a firm in Italy where the financial records stretch back to 1318. Here, two important books were used with the first one showing the results of trade, while the second type of books showed the workshop data. A third book was introduced later, and this one touched on wages. The period, therefore, saw the accounting of business outcomes, the labor costs required to manufacture given qualities of products and the cost of the machinery used in manufacturing. The early business people in that firm summarized the three books after certain intervals, where the totals of the summaries were exported to a ledger book. This is the origin of the ledger book since the modern ledger book has similarities to the ancient version. The ledger book was used to show whether the manufacturing period shown in the book was profitable or otherwise. Profits and losses were accounted for by taking into consideration aspects such as liability, capital, and total assets. The same methodology is applied to the modern day business.
Another common example of accounting practices during the Medieval Era was the application of the Medici Accounts by the Medici family of the 16th century. Double entry in books by this family date back as early as 1513 and some of the books here included the cash book, ledgers, journal and waste books. The focus of the Medici Accounts was coming up with a way through which the flow of both materials and funds would be controlled. An interesting aspect of the financial books used by this family was the use of subsidiary account books which showed traces of application of complex accounting techniques that were not common during that period.
The 17th and 18 centuries
According to historians, the period covered by the two centuries saw a reduction in the evolution of accounting ideas that had been used in the previous era. Here, some examples of accounting could be traced to the Worshipful Company of Bakers in 1620. This is a company that was involved in the bakery business (Tanis, n.d). After accounting for its operations, the company prepared a cost statement that sought to explain the company’s argument that the selling price of the bread was not enough since it could not cover the cost used in production.
Another example of accounting practice can be traced to companies that were involved in copper mining around Keswick in 1615. The owners of the copper mines were interested in coming up with an evaluation of the cost incurred during the production of rough copper. The accounting practices out in place during this period were comprehensive and sought to cover various aspect of production. The records, therefore, entailed weekly recording of costs incurred in labor, machinery, and horses. To come up with an annual estimate, the owners went on to multiply the entries by fifty-two, which is the number of weeks within a year. Other miscellaneous costs that were used during the production of copper were also included in the annual estimate, and this represented the cost of production that owners incurred. The owners applied the data obtained from the record in their marketing processes. Informed by the expenses, they made the decisions on whether selling their products at different geographical locations would lead to better outcomes. Decisions on the appropriate and cost efficient level of production were also made through the data obtained (Cunagin & Stancil, n.d).
The 17th century also saw the publication of various books that touched on various aspects of accounting. A good example her is a book published in 1750 in England that touched on various methods of bookkeeping (Tanis, n.d). Authored by James Dodson, the book analyzed the cost of producing shoes and recommended ways the options which manufacturers would use a variety of books to check continually their production patterns. The author advocated for the use of different books such as the sales books and the workman’s ledger. In the industry of shoe making which was his interest, the author toyed with the idea of cutting leather into different sizes which would produce different shoe sizes. The different shoes would then be assigned different values, depending on the cost incurred during the manufacturing.
The 18th century saw further advancements in accounting done. An example here is the Carron Company which was involved in the manufacturing of iron in Scotland. The company had more sophisticated approaches to cost accounting where different managers were given the responsibility of running various departments. The department needs were used as the means of deciding many funds allocated. Various products were accounted for differently, with products that could not cover their production costs being withdrawn from the market. The company also portrayed the use of various profit maximization techniques such as subcontracting (Cunagin & Stancil, n.d).
The 19th century
Most historians view this century as being responsible for many of the documented advancements on cost accounting. Some scholars argue that the period saw the birth of the modern concept of cost accounting since the big business started to appear. The activity of two industries during the period, the textiles industry and the Iron and Steel was the growth of this concept especially in the UK and the US. In the textile industry of the 19th century, companies in the UK were more advanced when it came to costing practices. There are many examples of the businesses that adopted elaborate methods of accounting. The Charlton Mills located in Manchester, for instance, made use of a double entry accounting system where trial balances were produced twice a month (Boyns & Edwards, 2013). The company had established fourteen different types of cost that were accounted for, touching on both labor and raw materials. The recording of the cost was aimed at producing a few charts that would show the costs attached to the processing process. The company also had a trading account, where sales were recorded. The company was one of the earliest institutions to make use of the concept of depreciation, which was unusually high during the more profitable years.
The iron and steel works companies were some of the biggest companies during the 19th century, and due to their mass production, had to have reliable cost data. Besides, there was the aspect of complex production processes, and this is a factor that drove these companies to develop highly their accounting techniques. The iron and steel companies employed various cost aspects such as labor, materials and overhead cost which are also used in the modern day businesses. The overhead cost, for instance, was allocated by considering the percentage of production costs that could be tied to particular departments or products (Tanis, n.d).
Borrowing heavily from the concepts applied by manufacturers, the railroad companies devised a progressive accounting system that evaluated and controlled the internal processes in the companies. The companies introduced a new concept used to measure production, and this was referred to as the tonmile. The company executives invested in formulas that calculated the cost per ton¬mile. These companies approached costs from four perspectives which were the maintenance costs, overhead costs personnel costs and a variety of operational expenses. Using the formula for calculating the cost per tonmile, the companies were able to root out the explanations for different outcomes in subsections of railways (Tanis, n.d).
Most authors view the 19th century as the period where cost accounting came up as an important discipline that helped in making the running of companies more efficient. During this period, various key concepts in cost accounting were introduced, with some of the techniques applied by the textile and iron industries still applied in the modern day world.
The 20th century
The 20th period saw a further improvement of the cost accounting concepts such as standard costing, overhead costs and process costs, which were introduced in the 19th century. The advances made during the century can be grouped into two, with some being before 1950 while others were post-1950. The earlier period saw the rise of accounting experts such as F. Taylor and Emerson, who sought to come up with new ways though which cost could be accounted for (Gleeson-White, 2012). Besides, the experts came up with ways of assessing the efficiency levels of different processes within organizations. During the early periods of the century, cost systems were used to reveal various forms of data that were ultimately used to make various managerial decisions. The systems put in place by engineers as opposed to financial experts were used to show some costs that could be attached to various products and different product lines. With time, however, these costing processes were ditched since the process of coming up with the costs increasingly became expensive, and the benefits of the process were not evident. Their place was taken by financial reports that evaluated costs of inventory (Chakraborty, 2004). Financial experts and accountants mainly provided these, and despite the efficacy of the procedures in financial reporting, they were not helpful for managers who wanted to make strategic plans or decisions appertaining certain products.
The early period of the 20th century made little contribution to the building of cost accounting as a discipline, but various concepts were introduced. Some of these included the development of the break¬even chart and the new notions of direct and indirect costs. Different categories of costs were also introduced, and these included the fixed, differential, variable and residual costs. Authors such as Maurice Clark of 1923 started advocating for the use of different forms of cost data when making financial records and when making strategic decisions (Tanis, n.d).
After 1950, significant strides in cost accounting were made. Despite literature being available on the concept, most of it focussed on manufacturing costs. Management accounting that takes into account more than the numbers was neglected, but interest started building after the introduction of the idea of using different types of costs for various reasons. The 60s saw the publication of literature that focussed on cost accounting that would be beneficial in making management decisions. The two concepts of controlling cost and the resulting management decision making were sincerely focussed on. Scholars started to conduct research on the relationships that different cost aspects had with managerial decision making (Chakraborty, 2004).
The 80s saw further literary activity that dealt with concepts of cost and management accounting. Most of the scholars had the view that the traditional cost accounting systems were not efficient since they had been out-dated and did not cover the modern production environments. Researchers especially took notice of the increase in the overhead costs, especially in the electronics and other related machinery industries. They theorized that the best way of managing overhead costs was by effectively controlling the transactions that took place within the factories. The period oversaw the introduction of the concept of a transaction based costing where groups of transactions within factories were established. The groups included Logistical transactions, Balancing transactions, Quality transactions and Change transactions. Other concepts introduced include activity based costing and concepts of hierarchical placement of the activities (Boyns & Edwards, 2013).
In conclusion, the evolution of cost accounting has seen the focus shift from an exclusive application of the principles in manufacturing to other industries such as service industries. The occurrence of events such as the 2008 financial crisis reiterates the need for further development of this discipline. This will be necessary to produce new accounting systems that deal with shortcomings discovered on a daily basis.
Bibliography
Boyns, T., & Edwards, J. R. (2013). A history of management accounting: The British experience. Routledge.
Chakraborty, S. K. (2004). Cost Accounting And Financial Management. New Age International,.
Cunagin, C., & Stancil, J. (n.d). COST ACCOUNTING: A HISTORY OF INNOVATION. Retrieved March 7, 2016, from ucumberlands.edu: https://www.ucumberlands.edu/downloads/academics/history/vol4/CunaginStancil92.html
Gleeson-White, J. (2012). Josiah Wedgwood and the Origins of Cost Accounting . Retrieved March 7, 2016, from costmgmt.org: http://www.costmgmt.org/dec2012-book-feature/
Tanis, V. (n.d). "Historical development of cost and management accounting in Europe and US.". Retrieved March 7, 2016, from ibrarian.net: http://www.ibrarian.net/navon/paper/HISTORICAL_DEVELOPMENT_OF_COST_AND_MANAGEMENT_ACC.pdf?paperid=12884850
