Accounting During Industrial Revolution

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Cost Accounting during the Industrial Revolution: The Present State of Historical Knowledge Author(s): Richard K. Fleischman and Thomas N. Tyson Source: The Economic History Review, New Series, Vol. 46, No. 3 (Aug., 1993), pp. 503-517Published by: on behalf of the Wiley Economic History SocietyStable URL: http://www.jstor.org/stable/2598365Accessed: 17-03-2015 13:05 UTC

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Economic History Review, XLVI, 3(I993), pp. 503-5I7

Cost accounting during the industrial revolution: the present state of historical knowledge1

By RICHARD K. FLEISCHMAN and THOMAS N. TYSON

One frequently overlooked benchmark of economic progress is the sophistication and quality of the cost accounting practised during a

particular age.2 Most fundamentally, cost accounting provides data necessary to measure the true cost of products to aid in the determination of selling prices. Costing is also integral, both in the past and at the present time, to evaluating the efficiency of the productive process and of decision making. Analyses of asset procurement, vertical integration, subcontracting, make- or-buy decisions, technological innovation, and product mix are representative of the many planning activities that require cost data.

Venerated surveys of accounting history, now nearly half a century old, date the advent of meaningful cost accounting to the mid i88os.3 The majority of these surveys, however, are not based on examinations of business archives but rather on the published works of professional accountants. Though some credit is given to British theorists of the time (for example, Garcke, Fells, and Norton), the practical applications of costing for decision making are said to have been developed in the United States as an innovation of Frederick Taylor's scientific management movement. Precious little predates this 'costing renaissance', according to the traditional view. One observer describes British reaction to early advances in cost accounting in other countries as 'so much burning of incense at the altar of window dressing instead of a tool for the attainment of continually growing production'.4 Richard Brown, the Edinburgh chartered accountant who made in 1905 an early attempt at a general history of the profession, published 300 pages without mention of industrial accounting.5

Despite the absence of literature on the subject, it is difficult to imagine that the entrepreneurs of the British and US industrial revolutions would have failed to appreciate the interrelationship between cost accounting and effective management. This linkage might be expected, given the economic

I The authors are grateful to Arthur Andersen & Company for finance without which this project would not have been possible. We would also like to thank J. R. Edwards, L. P. Kalbers, L. D. Parker, and an anonymous referee for their helpful comments on earlier drafts of this article.

2 The terms 'cost accounting', 'cost management', and 'costing' generally represent the use by management of cost-based information, and are used here interchangeably.

3Crossman, 'Genesis', p. 527; Garner, Evolution, p. 29; Littleton, Accounting, p. 322; Perren, 'Development', pp. i060-3; Solomons, Costing, p. 8; Yamey, 'Scientific bookkeeping', p. i09.

4 Stacey, English accountancy, p. 6o. 5Brown, History of accounting.

? Economic History Society 1993. Published by Blackwell Publishers, io8 Cowley Road, Oxford OX4 iJF, UK and 238 Main Street, Cambridge, MA 02I42, USA.



504 RICHARD K. FLEISCHMAN and THOMAS N. TYSON

sophistication of the age as reflected by innovative developments in marketing structure, technology, and capital accumulation. Moreover, in light of the transatlantic communication of industrial secrets, it is not reasonable to assume that American textile manufacturers disregarded cost accounting techniques developed earlier by their British counterparts.

These assumptions have not been universally accepted. Several historians of accounting write that the British should have been world leaders in the evolution of managerial accounting practices in view of the level of economic activity, but that they failed to meet expectations.6 Lister, an outspoken critic of the value of accounting history as a research area, focuses prominently on the industrial revolution in his indictment. Despite the period's legitimate reputation as a golden age of economics, he argues that the primitive state of accounting militated against its meaningful employment for the planning and control of large-scale operations.7

Our current understanding of cost management during the industrial revolution is the result of a cooperative effort between economic and accounting historians. The bulk of research into the business history of the period is contained in a substantial number of studies of individual firms and entrepreneurs, typically by economic historians who have invested considerable time, often a whole career, in the effort. These chronicle the activities of an individual company over an extended period and synthesize disparate topics to form an organized and complete economic picture. Such efforts are of uneven value to the historian of accounting who seeks to discover the emergence of modern accounting practices and the impact of these procedures on economic progress.

Parker observes the difficulty of achieving renown in both disciplines and argues that some economic historians, as a means of expanding the story of the enterprise under investigation, include accounting analyses in their presentations without a real understanding of basic issues.8 Johnson suggests that economic historians, untrained in accounting, have difficulty dealing with the increasing sophistication and complexity of accounting over time.9 Hudson, in good spirit, expresses hope that a trained account-ant will subsequently re-evaluate the business records she consulted to confirm her finding that there was no meaningful cost accounting in the woollen textile industry.10

For years, historians of accounting were remiss in failing to respond to the call for a closer investigation of surviving business records from the period of the industrial revolution. Forty years ago, Solomons urged a careful examination of industrial accounts to see what practical men of business were doing in answer to the charge of 'feebleness' conveyed by the bulk of the literature of accounting history.11 Only very recently have

6 Johnson and Kaplan, Relevance lost, p. I42; Solomons, Costing, p. 8. 7 Lister, 'Accounting as history', pp. 59-60. 8 Parker, 'Study of accounting history', p. 287. 9 Johnson, New approach, p. 66. 10 Hudson, 'Some aspects', p. I7. 1 Solomons, Costing, p. I7.

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COST ACCOUNTING DURING THE INDUSTRIAL REVOLUTION 505

historians of accounting begun to cast a wider net by studying primary source material.12

Perhaps accounting history can be excused its delinquency because it is a nascent research area with relatively few devotees. Even though accounting enjoys the advantage of a focus narrower than economics, the vast majority of researchers in the area have concentrated on various conceptual frameworks (neoclassical, Foucauldian, marxist) to explain the origins and development of accounting, rather than on archival research. Moreover, those researchers initially attracted to accounting history were led to expect little of value in industrial revolution business archives. Typically, Chatfield identified many shortcomings of pre-i88os costing methods, among them the failure to understand the effect of volume on prices, the non-utilization of costs for product line decisions, a concern only with past rather than future costs, and a general lack of sense about best practices.13

Even more telling has been the influence of a noted economic historian who bases his findings on a comprehensive study of existing business records. Pollard concludes that 'the practice of using accounts as direct aids to management was not one of the achievements of the British Industrial Revolution'. He concedes that accounting was capable of solving certain problems (such as stock control, prevention of embezzlement, or departmental comparisons), but he concludes that ultimately accounting did not come to guide management decisions.

This decisive conclusion may have been based on the premise that if profit margins were large accuracy of accounting was not essential, or on the belief that accountants' failure to deal rationally with large quantities of fixed capital indicated the absence of purposeful costing.14 In either case, because of the range of the sources Pollard consulted and because he is so widely revered among historians, accounting and economic alike, his negative comments on managerial accounting during the British industrial revolution may well have deterred re-examinations and possible revisionist interpretations.

I

The absence of eighteenth-century instructional manuals or other professional writings which deal with industrial accounting makes it under- standable that historians who have not examined a wide sample of surviving business records would assume that few substantial advances were being made. Most of the numerous contemporary accounting textbooks published in Britain and America dealt exclusively with merchant accounting techniques. Multi-edition textbooks by Bennett, Dilworth, Fisher, Hutton, Inglis, Kelly, Lee, Mair, Morrison, and Webster do not even mention industrial

12 Jones, Welsh industry; Fleischman and Parker, 'British entrepreneurs'; Tyson, 'Accounting for labor'.

13 Chatfield, Accounting thought, p. i6o. 14 Pollard, Genesis, pp. 245-8.

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accounting. Some awareness is apparent in two leading British manuals, Thompson's The accountant's oracle and Hamilton's An introduction to merchandise, both published in 1777.16 Cronhelm's Double entry by single (I8I8) includes a section on a woollen manufacturer's bookkeeping which traces entries through the three typical manufacturing inventory accounts, but has been regarded as superficial by later authorities.17 The earliest vestige of cost accounting literature is Babbage's On the economy of machinery and manufacturers (i835), in which the author advises industrialists to maintain accurate cost and time information on every manufacturing process and to institute quality control procedures.18 Although a few contenders appeared in the half century after Babbage, most accounting historians cite Garcke and Fell's Factory accounts, their principle and practice (i887) as the genesis of modern cost accounting literature.19

The traditional histories suggest that this deficiency in the instructional literature reflected a dearth of cost accounting activity, and do not consider the possibility that practice predated literature and theory.20 Many historians of accounting believe that entrepreneurs were inattentive to production costs because profit margins were so substantial.2 In reality, however, the period saw a keenness of competition, particularly in the dominant textile and iron industries, necessitating the advantage that effective costing could provide.22 English iron masters tracked not only the costs and productive potential of their own raw material inputs, but corresponding data for their competitors as well.23 Committees of directors of American textile mills, though they received no compensation or reimbursement of expenses, regularly audited financial reports, examined potential mill sites, contracted and set prices for machinery, determined specific products for manufacture, and developed procedures to reduce fire risk.24 In this light, it would appear that profit margins and dividend payout ratios were far less extravagant than is commonly thought. Even in those industries where profit margins were normally large (notably pottery and engineering), the sharp fluctuations between boom and slump suggest a recourse to effective costing, however sporadic.25 Though better accounting could not turn losses into profits, the bulk of accounting innovations, during the industrial revolution and

15 Bennett, American system; Dilworth, Young book-keeper's assistant; Fisher, Instructor; Hutton, Complete treatise; Inglis, Book-keeping; Kelly, Elements; Lee, American accomptant; Mair, Book-keeping; Morrison, Complete system; Webster, Essay.

16 Thompson, Accountant's oracle; Hamilton, Introduction. See Edwards, 'Some notes', pp. 228-9, 253, and Urwick and Brech, Scientific management, p. 2I for evaluations of these works.

17 Cronhelm, Double entry, pp. I25-8, evaluated in Littleton, Accounting, p. 334, and Solomons, Costing, pp. 7-8.

18 Babbage, Machinery and manufactures, pp. II5-7, i83-5. 19 Garcke and Fells, Factory accounts. See Garner, Evolution, p. 76, and Littleton, Accounting, p. 340

for discussion of the importance of this work in cost accounting history. 20 Edwards, 'Industrial cost accounting', p. 3I3; Solomons, Costing, p. I7. 21 Edwards, 'Some notes', p. 283; Hudson, 'Some aspects', p. I3; Parker, Management accounting,

pp. I9-20; idem, Accountancy profession, p. 4I; Pollard, Genesis, p. 245. 22 Fleischman and Parker, 'British entrepreneurs', pp. 370, 372. 23 Fleischman and Parker, 'Cost-accounting environment', pp. I44-52. 24 Appleton, Power loom, p. 29. 25 Edwards, 'Industrial cost accounting', p. 306.

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subsequently, were typically introduced during times of economic stag- nation.26

It is also suggested that firms were insufficiently complex to justify sophisticated cost accounting techniques,27 but the larger enterprises of the period were very substantial in terms of capital invested, personnel employed, and the number of integrated productive processes.28 It has further been argued that the preoccupation of entrepreneurs with technological innovation distracted them from the practicalities of running a business.29 This implies that they had no regard for long-term success, and is not a convincing argument. Nathan Appleton's remarks to the US House of Representatives in I832 clearly revealed his concern, as an owner of and investor in numerous New England textile mills, for accurate costings:

the first inquiry manufacturing makes is the original cost of the article with which he proposes to compete ... does the gentleman suppose that any rational man would erect a cotton mill to manufacture goods for exportation without ascertaining precisely what goods could be furnished for from Manchester?30

Historians who suspect the presence of cost accounting despite the absence of a literature come nearer the mark. Considerations of competitive advantage may have demanded strict secrecy about costing techniques,31 with cost accounting methods being passed only by word of mouth.32 Garner's 'busy man' theory similarly implies that costing techniques were not recorded because entrepreneurs were otherwise too preoccupied.33

The absence of a costing literature is not the only indication of the supposedly retarded development of industrial accounting. Stacey points out that accounting education was slow in coming to the UK.34 There was also little in the way of an accounting profession and its members rarely had manufacturers as clients.35 Moreover, the presentation of financial data was little influenced by accounting professionals, but was instead within the exclusive domain of management.36 There were, in fact, no universally accepted accounting conventions during the entire period.37 Notwithstanding these environmental deterrents, managerial accounting appears to have been widely practised. Along this line, Fleischman and Parker hypothesize that accounting innovations were not the product of professionals, managerial or

26 Hopwood, 'Trying to study accounting', p. 292; McKendrick, 'Wedgwood', p. 46. 27 Parker, Management accounting, pp. I9-20. 28 Johnson, 'Toward a new understanding', p. 5II. 29 Parker, Management accounting, pp. I9-20; Urwick and Brech, Scientific management, p. 2I. 30 Appleton, Remarks, p. Io. 31 Chatfield, Accounting thought, p. I04; Edwards, 'Some notes', p. 283; Garner, Evolution, p. 30;

Hudson, 'Some aspects', pp. 9-io; Urwick and Brech, Scientific management, p. 2I; Wells, 'Some influences', p. 48; idem, Common costs, p. 62. It is seldom evident, however, that secrecy was being maintained about the actual costs.

32 Chatfield, Accounting thought, p. I04; Garner, Evolution, p. 30. 33 Garner, Evolution, p. 30. 34 Stacey, English accountancy, pp. II-2. 35 Parker, Accountancy profession, p. 42. 36 Brief, 'Origin and evolution', p. 23. 37 Yamey, 'Accounting conventions', p. 22.





financial, but of perceptive businessmen who did costing by the seat of their pants and frequently got it right.38

Ultimately, the most pessimistic historians are those who argue that cost accounting was attempted, but that the industrial environment was too primitive to allow the adoption of anything but the most simplistic and unsophisticated methods. Proponents of this view identify the failure to allocate fixed costs, either because the amounts involved were minimal or because there was a fundamental lack of understanding of the relationship between costing and those expenses incidental to production.39 One economic historian characterizes attempts at overhead allocation before the i88os as 'unsystematic allowances, wild guesses, or complete omissions'.4O Wells grants the existence of certain more advanced accounting usages, such as departmental accounts and transfer pricing, but generally denigrates the application of cost accounting procedures until the increase in fixed assets after the industrial revolution necessitated a more careful allocation of common costs.41

Three other points have been raised to support the later timetable for the development of meaningful costing. Both Pollard and Yamey mention the lag in divorcing the personal affairs of entrepreneurs from their industrial pursuits.42 Chatfield and Parker both suggest that incentives to develop accurate costing techniques were absent until it became necessary to value inventory for financial reporting.43 Johnson and Chatfield separately point out that the integration of cost and commercial accounts for the coordination of multiple departments, as well as for the control of internally administered productive processes, was not accomplished until businesses became suf- ficiently complex to require significant interdepartmental transfers of cost.44

Notwithstanding these many arguments for the delayed development of cost accounting, evidence indicates that larger concerns, particularly in textiles and iron, had multiple integrated processes, and that the more sophisticated did employ transfer pricing.45 Edwards sees as overly simplified the arguments that cost accounting matured only as overheads grew relative to total production costs. Although administrative costs were high under the domestic system, overhead was not a significant element of total cost in certain industries where costing practices were first developed. Further, those indirect costs that comprised overhead in the early industrial age were irrelevant for decision making purposes.46 We will see that there is new

38 Fleischman and Parker, 'Carron', p. 2I2. 39 Chatfield, Accounting thought, pp. I03-4; Edwards, 'Some notes', p. 255; Johnson,, 'Lyman mills',

p. 467; Parker, Accountancy profession, p. 4I; Pollard, Genesis, p. 226. 40 Hudson, 'Some aspects', p. II. 41 Wells, 'Some influences', p. 47; idem, Common costs, p. 69; idem, 'Market simulation', pp. 72-4.

See also Pollard, Genesis, p. 2I3. 42 Pollard, Genesis, p. 226; Yamey, 'Scientific bookkeeping', p. i09. 43 Chatfield, Accounting thought, p. I05; Parker, Accountancy profession, p. 42. 4 Chatfield, Accounting thought, pp. I03, I59; Johnson, 'Lyman mills', p. 467; idem, Management

accounting, p. 5II. 45 Edwards and Newell, 'Development', p. 50; Fleischman and Parker, 'Carron', p. 2i6; Stone,

'Charlton mills', p. 78. 46 Edwards, 'Industrial cost accounting', p. 3I2.





evidence for a more encouraging view of cost accounting practices in the industrial revolution.

II Researchers have only begun to collect data which may eventually refute

the reservations of Pollard, Chatfield, and others regarding the emergence of modern cost accounting procedures. Roll provides evidence of superior cost management at Boulton & Watt's Soho Foundry. He details sophisticated costing methods featuring the articulation of time and motion standards, elaborate costing calculations (including the application of overhead), scientific price fixing, departmental profit analysis, and process efficiency testing.47 The fact that Roll's pioneering work went unnoticed for 40 years may be indicative of the fact that his findings were dismissed as exceptional and isolated.

In one of the earliest examples of historical revisionism, McKendrick finds that Wedgwood, the pottery king, though dealing in a luxury product and a less highly competitive market, employed intricate cost data for determining pricing policy and analysing the economics of large-scale production. Wedgwood was concerned, particularly in periods of economic depression, that the output of certain productive lines be sufficient to justify the fixed costs they bore.48

Research into early nineteenth-century textile mills in the UK and US has produced additional fruitful results. Stone uncovered cost accounting methods at the Chorlton Mills in i8io that were 'not believed to have been in use until the early twentieth century'. These included the allocation of overhead to cost centres on the basis of predetermined rates and rudimentary examples of transfer pricing.49 Johnson's study of the Lyman Mills in mid- nineteenth-century New England anticipated evidence subsequently found by Fleischman and Parker for a multitude of earlier British textile firms.50 New England mill owners were attuned to British manufacturing methods and borrowed a variety of sophisticated costing techniques.5'

A study of records at the Newmills Cloth Manufactory at Haddington in Scotland has uncovered the use of costing procedures for process evaluation, product line decisions, raw material control, and 'rational planning' as early as the late seventeenth century.52 In the same country the Carron iron company in the second half of the eighteenth century used sophisticated cost accounting in such diverse areas as responsibility management, overhead allocation, costing for decision making, and inventory control.53

Broadly based studies of industrial revolution business records have further reinforced revisionist interpretations. Jones surveys Welsh accounting

47 Roll, Early experiment, pp. 244, 249-50, 256-7, 269. 48 McKendrick, 'Wedgwood', pp. 48, 53-4. 49 Stone, 'Charlton mills', pp. 7I, 77. 50 Johnson, 'Lyman mills'; Fleischman and Parker, 'British entrepreneurs'. Particularly impressive

was the cost accounting employed at Ashworths, Gregs, Marshalls, Oldknows, and Strutts. 51 Massachusetts Historical Society, Boston, archive of Appleton family papers, boxes 4 and 5. 52 Marshall, Presbyteries, pp. I42, I56, I58, i67, I72, I74. 53 Fleischman and Parker, 'Carron', pp. 214-20.




5IO RICHARD K. FLEISCHMAN and THOMAS N. TYSON

during the period and finds sophisticated costings, most notably at Mona Mines and the Crawshays' Cyfarthfa iron installation.54 Fleischman and Parker examine the surviving records of 25 large business enterprises, mostly in the iron and textile industries. Although a number of sizeable firms with voluminous records such as McConnel & Kennedy, James Finlay, and Newton, Chambers yielded very little relevant material, the majority of the companies they studied manifested substantial activity in cost control, overhead accounting, and cost-based decision making.55 Tyson's research into the business archives of firms in Lowell, Massachusetts has uncovered cost reports that were used to compare the financial performance of different mills and may have stimulated cost reduction.56

The traditional accounting histories remain influential, however, and at least one eminent British historian of accounting remains unconvinced by the revisionist activities of the past 20 years.57 We must ask how historians have arrived at such diametrically opposite conclusions in a subject area which is not unlike the debate on living standards in the industrial revolution.

The restricted availability of archival resources has limited research into accounting, and the lack of easy access to accounting documents may also have diminished insights into the existence and complexity of cost accounting systems. Traditional accounting historians appear to have reached their conclusions on assumptions drawn from the instruction manuals of the period. As more financial records come under scrutiny, interpretations are being reconsidered.

The approach of the researchers can have an important effect on their findings. Significant differences can arise if the context of the organization, the industry, and the time period are not explicitly considered as part of the analysis. The methodology of the discipline in which the researcher was trained can also colour the conclusions. Another pertinent factor is the level of sophistication ascribed to the cost systems themselves. In discussing the differential findings of Pollard and Jones, Edwards notes the possibility that the economic historian 'has rather grander ideas of the potential of management information systems in use in earlier times and today than does the accountant'.58

Also problematic is the lack of congruence regarding the definitions of common accounting terms. For example, some historians employ the terminology 'standard costs' to describe the use of norm-based target costs, while others limit the expression to situations in which actual to standard cost variances are computed and analysed.59 Another problem in evaluating the quality of managerial accounting during the industrial revolution lies in

54 Jones, Welsh industry, pp. II5-47, I9I, 204; Edwards, 'Industrial cost accounting', pp. 3II-3. The more broadly based article by Edwards and Newell recounts much revisionist research, but is oriented towards Welsh economic enterprises in the tradition of the earlier work of Jones and Edwards.

55 Fleischman and Parker, 'British entrepreneurs', pp. 363-8. 56 Tyson, 'Nature and environment', p. II. 57 Parker, Management accounting; idem, Accountancy profession. 58 Edwards, 'Industrial cost accounting', p. 3i6. We are particularly indebted to Prof. L. P. Kalbers

for ideas related to this discussion. 59 See, for example, this difference in definition as it appears in Fleischman and Parker, 'British

entrepreneurs', pp. 368-70, and Tyson, 'Nature and environment'.




COST ACCOUNTING DURING THE INDUSTRIAL REVOLUTION 5II

the requisite components of 'good costing'. A universal acceptance of accounting conventions or techniques would indicate a modicum of sophistication, but it hardly seems an imperative. Given the absence in early accountancy of a core literature, an established curriculum, and recognized professional status, the wheel had to be reinvented in multiple venues. Those charged with the cost accounting function would be expected to transmit methods of their own devising rather than to write textbooks.60 In some instances the surviving accounting archives suggest that useful ideas and systems developed by individual firms and their bookkeepers died with them, since there were no means of transmitting these practices to the business world in general.

A lack of standardization would be particularly evident if new methods were developed by the entrepreneurs themselves and adapted to their unique situations. Edwards points out that the variety and ad hoc nature of pre- I830 costing reflected innovative attempts of firms to structure accounting information to their needs.6' Hopwood and Johnson, as defenders of accounting history responding to Lister's debunking article, argue that elaborate accounting systems are not a necessary precondition to generate information useful for economic decision making.62 The questions that need to be asked when evaluating the importance of costing techniques to any older society are fundamental. Was accounting used, at least in part, to make business decisions? Did the accounting, however unsophisticated, lead to correct decisions? How frequently and for what reasons did distorted accounting lead businessmen astray and result in a failure to maximize their firms' goals?63

The uses of cost accounting are varied, ranging from scientific pricing, on the one hand, to planning, control, and decision making on the other. However, there seems to be a prejudice, perhaps a product of our own time, that unless techniques are employed for the planning and decision making functions, they are unsophisticated and antiquated.64 Provocative writings, such as Johnson and Kaplan's Relevance lost, have moved accounting history to centre stage, and have raised serious questions about the capability of modern methods to provide useful data, not to mention their ability to serve as yardsticks of cost accounting efficiency in earlier societies.65 Since a contemporary problem of US management is its inability to determine which product lines are profitable,66 it may be presumptuous to denigrate the costing efforts of industrial revolution entrepreneurs.

Without question, the context of accounting has now changed dramatically with the advent of an accounting profession, the demand for uniformity from regulatory agencies, and the development of computer technology for information dispersion. Accordingly, there has been substantial protest

60 Garner, Evolution, p. 30. 61 Edwards, 'Industrial cost accounting', p. 3I5; Edwards and Newell, 'Development', pp. 47-8. 62 Lister, 'Accounting as history'; Hopwood and Johnson, 'Accounting history's claim', p. 43. 63 Edwards, 'Industrial cost accounting', p. 3I5; Yamey, 'Some reflections', p. I32. 64 Chatfield, Accounting thought, p. ioi; Hudson, 'Some aspects', p. II. 65 Johnson and Kaplan, Relevance lost, pp. 234-44. 66 Ibid.; Edwards, 'Industrial cost accounting', p. 3i6.




5I2 RICHARD K. FLEISCHMAN and THOMAS N. TYSON

against traditional criticisms of earlier methods and applications.67 In reflecting on the chronology of accounting historiography, Hopwood and Johnson write:

Many accounting historians writing before the late i960s adopted that view [to judge the past in terms of the present] when they evaluated pre-twentieth century accounting artifacts in terms of twentieth century financial accounting categories. Their concern was to trace 'origins' on the assumption that the past 'evolves' into the present in a logical, ordered fashion.68

Judgements of cost accounting in the industrial revolution have suffered partly because of the primitive state of the financial accounting of the period. Hudson details the shortcomings of financial reporting before the late nineteenth century.69 The problem is demonstrated most vividly by Campbell's blanket denunciation of Carron Company's accounting on the basis of its poor financial reporting, when, in fact, its cost accounting was exemplary among contemporary firms.70 Pollard is harsh but essentially correct when he identifies the failings of financial accounting-suspect profit calculations, 'confusion between capital and revenue', non-recognition of depreciation, and the treatment of interest on owners' investment as a cost.7' However, these charges should not be extended to costing methods which typically address very different agendas.72 For example, the concept of depreciation was widely known and the need to recognize wear and tear was explicitly discussed in publications available to British and US textile mill owners and managers.73 Nevertheless, depreciation was not recorded methodically because of the absence of financial reporting requirements. Depreciation numbers were also unlikely to influence asset replacement decisions, given the rapid pace of technological innovation during the later stages of the industrial revolution.74 Textile mill owners typically recorded expenditures to maintain and renew existing machinery in a 'repairs' account that was fully charged to income.75 They frequently issued new capital stock when productive capacity was expanded.76 This accounting for fixed assets better reflected reality than an arbitrary allocation of original cost to time periods which was characteristic of most contemporary depreciation methods.

In writing about the early American experience, Johnson and Kaplan observe that 'the management accounting measures were designed to motivate and evaluate the efficiency of internal processes, not to measure the overall "profit" of the enterprise.'77 Given the primitive state of financial accounting

67 Edwards, 'Industrial cost accounting', p. 3I5; Hopwood and Johnson, 'Accounting history's claim', p. 40; Johnson, 'New understanding', p. 5i6.

68 Hopwood and Johnson, 'Accounting history's claim', p. 45. 69 Hudson, Industrial capital, pp. 236-7. 70 Campbell, Carron, pp. I36-7; Fleischman and Parker, 'Carron', p. 220. 71 Pollard, Genesis, p. 233. 72 See Edwards, 'Industrial cost accounting', p. 3i6. 73 Montgomery, Cotton manufacture, p. i9i. 74 McGaw, 'Accounting for innovation', p. 7II. 75 Porter, 'Waltham system', p. 7. 76 Appleton, Power loom, p. 30. 77 Johnson and Kaplan, Relevance lost, p. 9.




COST ACCOUNTING DURING THE INDUSTRIAL REVOLUTION 5I3

theory during the period, cost management procedures traditionally rated as merely adequate would be impressive by contrast.

Pollard is on firmer ground with regard to two other components of his indictment of industrial revolution cost accounting. He concedes that the number of existing cost estimates is impressive, but doubts both their accuracy and their usefulness.78 Pollard, it will be recalled, attributes a 'cavalier attitude' about exact costing to the existence of sizeable profit margins.79 However, the matching of ex ante cost analyses and estimates with post factum implementation of action seems essential for 'purposeful' cost accounting. The problem lies in the fragmentary nature of surviving archival material for most enterprises. Nevertheless, Fleischman and Parker are far more optimistic than Pollard that these linkages exist.80 It can also be argued that during the industrial revolution there was less need than there is today to use accounting both as a tool (ex ante) and a rationale (post factum) for decision making.

A second shortcoming, persuasively cited by Pollard and others, is the failure to integrate the financial and cost accounts.8' The jury is still out on the ability of the revisionists to answer this charge, though Mepham writes of Hamilton's attention to this issue in his first edition (I777); Jones and Edwards find evidence at Mona Mines and Cyfarthfa; and Fleischman and Parker identify a modicum of integration at Carron exemplified by the firm's utilization of transfer pricing, standard costing, and departmental allocation of overhead.82 Furthermore, any extensive effort to demonstrate the impact of costing data on commercial accounts would be doomed to failure because of the acknowledged low standard of financial reporting.

III

The chronology of meaningful cost accounting is being revised, and the starting point for a variety of costing activities continues to be pushed back. The traditional accounting histories suggest that the age of Taylor (the i88os) saw the emergence of modern practice. Chandler finds origins in the heyday of American railway management, while Johnson details significant advances in New England textile factories of the i850S.83 Much attention has recently been focused on the costing employed at the Springfield Armory in the i830S.84 And now a quantum leap backwards to the British industrial revolution is foreshadowed in the work of Edwards, Fleischman and Parker, and Jones.85

78 Pollard, Genesis, p. 220. See also Hudson, 'Some aspects', pp. II-2. 79 Pollard, Genesis, p. 265. 80 Fleischman and Parker, 'British entrepreneurs', pp. 37I-2. 81 Chatfield, Accounting thought, pp. I03, I59; Garcke and Fells, Factory accounts, pp. v-vi; Johnson,

'Lyman mills', p. 467; Pollard, Genesis, p. 233. 82 Edwards, 'Industrial cost accounting', pp. 3II-4; Edwards and Newell, 'Development', pp. 4I, 49-

50; Fleischman and Parker, 'Carron', p. 220; Mepham, 'Eighteenth-century origins', p. 68. 83 Chandler, Visible hand; Johnson, 'Lyman mills'. 84 Hoskin and Macve, 'Genesis of accountability'; Tyson, 'Accounting for labor'. 85 Edwards, 'Industrial cost accounting'; Fleischman and Parker, 'British entrepreneurs'; Jones, Welsh

industry.




5I4 RICHARD K. FLEISCHMAN and THOMAS N. TYSON

The latest attempts to explain the genesis of cost accounting reinforce mainstream interpretations of accounting history which are based in economics. Chandler is prominent in representing the economic historians, attributing the evolution of effective cost accounting techniques to economic rationalism. In his view, cost accounting developed as a rational tool for management facing diversity and complexity.86 Johnson, a historian of accounting, expands this position by arguing that bookkeeping evolved into accounting only at the point when market prices ceased to provide entrepreneurs with the information necessary for the most efficient conduct of economic activity. Accounting information became particularly necessary to monitor conversion processes.87 Johnson suspects that these conditions existed in eighteenth-century English textile firms, although the earliest evidence he finds of industrial accounting was at the Lyman mills in the I850s.88

More recently, Johnson and Kaplan uphold Chandler's views, urging that cost accounting developed as a rational business response to opportunities involving new technologies and markets. Moreover, they emphasize efficiency improvement as a means of explaining accounting change.89 Fleischman and Parker similarly conclude that the profit-motivated behaviour of entrepreneurs was a significant driving force in costing developments.90 Tyson also finds that economic rationales provided the best explanation of nineteenth-century costing developments at the Springfield Armory and New England textile mills.9'

A number of recent interpreters of cost accounting development, schooled in the historical vision of Foucault, are attempting to stake out territory at the expense of economic rationalism.92 However, their unique socio-political rationale for cost accounting developments does not hold up well under close scrutiny.93 In point of fact, the search for origins should not be the primary focus, as has been the case with many revisionist undertakings. The origins of cost accounting lie in such disparate events that motivations for costing may have differed as a function of time as well as location. Consequently, Wedgwood may have had the disciplining of labour as one of many reasons for introducing new costing methods, while the owners of textile factories may have been driven, in part, by the need for new sources of information that the market mechanism could no longer provide. There is simply no evidence to deny that multiple motivations contributed to cost

86 Chandler, Visible hand, pp. I09-I7; idem, 'Beginnings of "big business"', p. 28. See also Zald, 'Sociology of enterprise', p. 337.

87 Johnson, Role of accountancy, pp. 5-8. 88 Ibid., p. 5; idem, 'Lyman mills', pp. 466-74. 89 Johnson and Kaplan, Relevance lost, pp. 6-9. 90 Fleischman and Parker, 'Carron', pp. 2I2-3. 91 Tyson, 'Accounting for labor', p. 57. 92 Ezzamel, Hoskin, and Macve, 'Managing it all'; Hopwood, 'Archaeology'; Hoskin and Macve,

'Genesis of accountability'; idem, 'Genesis of managerialism'; Loft, 'Critical understanding'; Miller and O'Leary, 'Governable person'.

93 Tyson, 'Accounting for labor', pp. 57-8; idem, 'Nature and environment', p. 20.





management developments. Hopwood characterizes the synthesis well when he writes:

no unitary mobilizing force, be it an economic rationality, a social intent or a political will, has been found to be silently embedded within the shifting course of accounting's subsequent path of modification.94

What seems assured is that researchers in accounting history will continue to examine business records in search of origins and explanations of methodological innovations. Pollard currently has the advantage in that he has examined a wider variety of industries and firm sizes than have historians of accounting, at least in their published work. It may even happen that more economic historians will take a greater interest in accounting at the micro level if the developing literature on the subject's broader context is able to establish accounting technology as a focal point for examining organizational change. In any case, while the particular motivations underlying costing developments will continue to be debated, evidence clearly suggests that cost accounting practices during the industrial revolution were far more developed and widely utilized than many renowned scholars have believed.

John Carroll University, Cleveland, Ohio St John Fisher College, Rochester, New York

94 Hopwood, 'Archaeology', p. 227.

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5i6 RICHARD K. FLEISCHMAN and THOMAS N. TYSON

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Accounting During Industrial Revolution