Professional Documents
Culture Documents
Management accounting first emerged as a significant activity during the early industrial revolution, in the leading industries and enterprises of the day. As such, management accounting arose after financial accounting, which can trace its origins to its stewardship role in European merchant trading ventures beginning in the Italian Renaissance, and to tax records that governments apparently have required for as long as governments have existed. Double-entry bookkeeping had been used for more than 300 years by the time management accounting first emerged as a recognizable field. Two leading industries of the industrial revolution that played important roles in the early history of management accounting were textiles and railroads. Textile mills used raw materials and labor to make fabrics and associated products, and the mills developed methods to track the efficiency with which they used these inputs. Railroads required significant investments of capital over long periods of time for the construction of roadbed and track. Once operational, railroads handled large volumes of cash receipts from numerous customers, and developed both financial and operational measures of efficiency for moving passengers and freight. By the end of the 19th century, new industries and types of businesses were becoming important to the economies of the United States, Great Britain, and other industrializing nations. These enterprises included steel producers, mass producers of consumer products such as foodstuffs and tobacco, and mass merchandisers such as Sears, Roebuck & Company. Leading companies in these industries developed accounting systems to meet their needs for operational control. In the first two decades of the 20th century, the fields of industrial engineering and management accounting developed in tandem. During this period, industrial engineers developed methods to control production that included a scientific determination of standards for inputs of materials, labor and machine time, against which actual results could be compared. This development led directly to standard costing systems, which are still widely used by manufacturing companies. Management accounting concepts and techniques continued to evolve rapidly throughout the rest of the first half of the 20th century, and by 1950 most of the key elements of management accounting as practiced today were well established. These developments occurred in a decentralized fashion, inside large companies that were using common sense and commonplace bookkeeping and analytical tools to meet their internal reporting requirements. Companies that business historians have identified as innovators in management accounting practice during this period include DuPont, General Motors and General Electric. However, an innovator is not necessarily a leader. There appears to have been relatively little communication among companies regarding the management accounting methods that were developed. Perhaps managers and accountants viewed these accounting systems and techniques as proprietary, a possible source of competitive advantage. Also, there was no institutional or regulatory impetus for sharing information. In the early 1900s, there was no association of management accountants to hold annual meetings in Chicago or Boston for continuing professional education and revelry. There was no government oversight of management accounting practice. With very few exceptions, management accounting itself was not required for regulatory purposes until the Foreign Corrupt Practices Act of 1977, which mandated that large companies maintain adequate systems of internal control. Even today, companies have a
great deal of discretion in the design of management accounting systems, and management accounting looks very different from one company to another even within the same industry.
industries noted for significant developments in their management accounting systems include transportation, financial institutions, and health care. Customer costing (determining the cost of servicing an individual customer), and improving the timeliness of accounting information, are two issues of particular importance to many service sector companies.
The challenge in a JIT environment is to avoid stock-outs. To meet this challenge, some companies have found ways to decrease production lead times. Shorter production schedules result in less work-in-process inventory, and also allows companies to maintain lower levels of finished goods inventory while still maintaining high levels of customer satisfaction. Early in the 21st century, acts of terrorism (such as the destruction of the World Trade Center in New York City) and natural disasters (such as Hurricane Katrina) prompted some companies to rethink the practice of maintaining extremely low levels of inventories. These companies are concerned that future incidents could result in the disruption of inventory pipelines, particularly for imported materials. Consequently, the advantage of maintaining safety stocks of inventory is receiving renewed interest. Theory of constraints: The theory of constraints is an operations management technique that decreases inventory levels and increase throughput in a manufacturing setting. Eliyahu Goldratt, a business consultant, is largely responsible for the development of the theory of constraints. Goldratt popularized his ideas in a business novel that he coauthored with Jeff Cox called The Goal: A Process of Ongoing Improvement. The basis of the theory is to identify bottlenecks in the production process, and to focus all efforts on increasing the capacity of the bottleneck operations. Typically, bottleneck operations are easy to identify, because large amounts of inventory back up at these operations waiting to be processed. The theory of constraints also advocates setting the speed of the entire production process at the speed of the bottleneck operation, because otherwise excess work-in-process will inevitably build up. This pull system should replace traditional push systems, where every operation processes inventory at its maximum capacity. Like most new ideas, the theory of constraints has a basis in earlier techniques and ideas. As early as the 1970s or 1980s, engineers and production managers used a tool called critical path analysis to predict the time required to accomplish major new objectives, such as introducing a new product or bringing a new facility on line. Critical path analysis involved identifying the sequence in which various steps were required, and identifying at what point, and for how long, the entire project would depend on the completion of any particular step. Lean production and the lean enterprise: In recent years, the term lean has been adopted by some organizations to describe the organizations comprehensive effort to apply state-of-the-art management practices to improve quality and customer satisfaction, reduce costs and production lead-times, and increase value-creation. Lean is an umbrella term that includes such techniques as JIT and TQM as component elements. Some accountants credit Toyota as the originator of lean production. The term lean was originally applied to manufacturing settings, such as in the phrases lean production or lean manufacturing. But the term is now used more broadly, and sometimes describes lean initiatives in the distribution and support functions of a manufacturing company, lean initiatives in service-sector companies, and even initiatives in other types of organizations such as governmental entities. The term lean accounting has been coined to describe accounting systems that either support lean production, or that are, themselves, lean.