Cost accounting and management control practices can be traced to supporting the growth of large transportation, production and distribution enterprises during the period of 1850-1925. The need for these areas came in the beginning of the 19th century when firms needed internal administrative procedures to coordinate all the processes involved in their activities. Railroads handled huge amounts of goods/people and money and therefore need a way to summarize this amount of transactions. Railroads also developed a system for evaluating and controlling their subunits’ performance. As companies developed in mass production and distribution the practice of internal accounting spread. Cost sheets were produced by Carnegies’ steel company. They allowed for monthly and eventually daily statements of the company’s costs and provided a way to compare costs from month to month and even with other companies as well as evaluate process improvements, quality of materials and in decision making. These methods of cost accounting only looked at prime costs and did not use the allocation of fixed costs at all.
Scientific management led to the further development of cost accounting methods. Scientific standards for the amount of labor and material used to produce a unit of outcome were used to determine pay and bonuses given to workers on a piece basis. This is also where overhead costs began being measured and allocated. Standard costs also came into use at this time. Breakeven charts that expressed variation of cost with output showed up in writings in both England and the United States as early as 1903.
By 1925 many accounting theories and practices were being used to improve the efficiencies of mass production enterprises. At this time financial, cost and capital accounting were all kept separate. Cost accounting was used to evaluate operating and to make decisions regarding pricing and worker performance.
DuPont is considered to be an innovator in the modern managerial control system. The three smaller, family owned enterprises were combined with other family firms and began using an organizational structure that used the “best practice” of the time. They used a centralized accounting system that allowed top management to make decisions regarding the allocation of new investments and financing new capital requirements. In DuPont firms were decentralized into departments such as manufacturing, sales, finance and purchasing, with the manager of each becoming a specialist in that area which allowed them to maximize the performance of their area and the entire firm. This type of organization required a performance measurement system that could be used to evaluate departmental performance and overall firm strategy. DuPont came up with a measure called Return of Investment that served as both an indicator of efficiency and a measure of financial performance company wide. This method was also used to evaluate new proposals and facilitated the allocation of funds among product lines. Later ROI was changed into the product of the sales turnover ratio, which is sales divided by total investment, and the operating ratio of earnings to sales. This breakdown allowed departments to find out how their performance affected either the operating ratio or sales turnover and explain why ROI would differ from budgeted ROI. ‘
General Motors used an organizational form and reporting and evaluating system that is used in almost all modern enterprises. They recognized that in some years ROI would be lower and therefore set a goal to earn an average satisfactory ROI over the entire business cycle and also used a pricing formula that allowed them to determine a target price that would accomplish the ROI when production and sales were at a regular volume. The price was determined by looking at the competitive marketplace and this provided a link between short-term operating plan and the financial strategy of top management....