Summary by Anthony M. Cunha
Master of Accountancy Program
University of South Florida Summer 2002
Many of the practices that are now known as management accounting were thought of as unreliable or impractical in the first half of the 20th century. Robert N. Anthony has seen much change throughout his years in accounting. In this article he walks us through the many stages of growth that management accounting has undergone in the last approximately one hundred years.
He starts his story by telling about practices that were used in many large companies in the nineteenth century. Practices such as standard costs, overhead rates, opportunity cost, and profit centers (p. 1). He goes on to talk about how these and other items that we now know of as part of management accounting showed up in early accounting books. These practices were not first thought of as the broad subject now called management accounting, instead they were in the business curriculum as part of cost accounting. Very few institutions actually taught courses in management accounting in the early nineteen hundreds. Anthony talked some about a Professor he had at Harvard who covered the topics in a course titled Budgetary Controls in the thirties and forties. After the second World War Anthony, as a new assistant professor, was asked to build cases and notes for a new accounting course on management accounting that was included in the major curriculum changes at Harvard Business School. In 1954 Anthony submitted his notes to a publisher with the hopes of compiling them into a management accounting book. This book and a few others released at the same time are what Anthony credits as the beginning of management accounting.
At the time when management accounting courses first appeared they differed from what was being taught as cost accounting at the time in two main ways. First was the human aspect of the numbers which (the old) cost accounting overlooked. Management accounting took into account the idea that the end numbers were used by people to make decisions including how accounting information could influence behavior. The second difference was that cost accounting focused mainly on full costing (finding the true cost) while management accounting covered a much broader range of topics.
Management accounting as a topic distinct from cost accounting continued to gain acceptance through developments such as; the National Association of Cost Accountants dropping "Cost" from their name, changing the NAA magazine title to Management Accounting, and the NAA establishment of a Certificate of Management Accounting similar to the CPA exam. Also was the formation of the Committee on Cost Concepts and Standards by the American Accounting Association in 1954. This committee came to a three-part classification of cost information. The report, "Tentative Statement of Cost Concepts Underlying Reports for Management Purposes", was published in 1956. (P. 4) This report included three classifications called, "full cost", differential cost", and responsibility cost".
Full cost constructions are used to arrive at the "normal" or "selling" price. This is the sum of its direct cost along with a fair allocation of its indirect cost. Over the past 30 years this method of cost analysis has been greatly refined. Through the use of such techniques as the conversion of indirect cost to direct cost, the instillation of meters on machines, refining standard cost, and other such techniques to refine cost has allowed managers to make more realistic measurements of full cost. Until the 1960’s most examples of full cost accounting were based on the use of manufacturing as the case study. In more recent times the use of full cost accounting has been moved to other industries and been found to be very helpful. Accounting firms now keep track of the salary cost of those working on a set client so they can bill more realistically for the time and level of experience used.
The other problem full cost accounting had was its need to bypass the economic view that profit maximization is the main goal of all companies. The microeconomic view was that where marginal revenue and marginal cost meet is where a company should produce to maximize profit. Full cost accounting had to validate itself through the idea that most companies never know what their demand curve is, never know what price customers are willing to pay, and that satisfactory profits rather than maximum profits is a more realistic goal for a company. Management accounting had to convince users that this was a realistic way to find cost and to add a satisfactory profit.
Anthony then goes on to talk about differential costs, some of the items that are included in differential cost, and how perception in the accounting field has changed regarding them. First was the use of present value in cost calculations. A Supreme Court case involving the United Shoe Machinery Company was a pivotal case. The Court held that the company must offer for sale machines that it had only offered as leases before. Present value was used to come to a fair price that represented an amount approximating the expected stream of lease income loss by the sale. As present value calculations became more widely used, the present value tables we now use were created to take away the need for long logarithmic calculations. Also was the idea of a required earning rate. Anthony felt that a computation could not be made that would accurately find the cost of capital therefore management would be better served by using a rate that would exceed the cost of capital, or ten percent when in doubt. The last area for differential cost that Anthony discussed was that of the internal rate of return (IRR) and net present value (NPV). He discussed how NPV became more prevalent after a 1958 article pointed out that IRR sometimes leads to two different IRR solutions, both of which are mathematically correct. Use of the NPV did not involve this problem and soon NVP took preference over the IRR in most capital budgeting decisions.
Responsibility accounting was the last subject that Anthony talked about from the report "Tentative Statement of Cost Concepts Underlying Reports for Management Purposes". He discussed subjects such as responsibility centers, profit centers, transfer pricing, planning and control frameworks and extensions in other industries. Some ideas such as responsibility centers and transfer pricing are fairly new, coming about in publications in the 1950’s. Others, such as profit centers were just reexaminations of old ideas that were used by railroads and other large companies as far back as the 1800’s. The last topic was about the move of management accounting from mostly manufacturing companies into other areas such as merchandising and service industries.
In the last section of the article Anthony talks briefly about many of the different ideas that have been formulated by the management accounting profession in recent times. Ideas such as zero based budgeting and planning, programming, budgeting systems that were used widely by government in the late 60’s and most of the 70’s. Also are the contributions that students make through their interaction with professors. The use of sophisticated models, though thought of by Anthony as cumbersome, are credited as helping to build progressive thinking and innovation. Newer ideas such as human resource accounting, inflation accounting and manufacturing cost accounting have potential but need much more research and inquiry. Anthony also talks about prospects for future management accounting progress. Through the use of computers he sees that management can gain more timely information and perhaps even attempt to automate some of the more simple management decisions. He discusses a need for new measurement and appraisal techniques for both management and for the information they use. Last is the need for a continuance of research in the area of management accounting and a hope that users or government will be able to supplement the high cost of such research.
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