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Manufacturing Costing Page 2

This document discusses the history of cost accounting methods. It notes that double-entry bookkeeping developed in Italy in the 14th-15th centuries was a predecessor to modern accounting. In the 1850s-1860s, accountants in the American railroad industry developed early modern cost accounting methods to track costs. Cost accounting emerged as railroads calculated operating ratios and sought to accurately determine unit costs by relating overhead and capital depreciation to production volumes. The Louisville & Nashville Railroad first used cost accounting in the late 1860s to evaluate manager performance based on measures like cost per ton-mile.

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46 views1 page

Manufacturing Costing Page 2

This document discusses the history of cost accounting methods. It notes that double-entry bookkeeping developed in Italy in the 14th-15th centuries was a predecessor to modern accounting. In the 1850s-1860s, accountants in the American railroad industry developed early modern cost accounting methods to track costs. Cost accounting emerged as railroads calculated operating ratios and sought to accurately determine unit costs by relating overhead and capital depreciation to production volumes. The Louisville & Nashville Railroad first used cost accounting in the late 1860s to evaluate manager performance based on measures like cost per ton-mile.

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Bazi
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© © All Rights Reserved
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the tasks less expensively.

Use of this method is sometimes referred to as activity-based cost


management (ABCM) or simply activity-based management (ABM).

HISTORY OF COSTING METHODS

Double-entry bookkeeping, developed in Northern Italy in the 14th and 15th centuries, was the
predecessor to modem accounting methods. Early modem methods were developed in the United
States in the 1850s and 1860s by accountants in the railroad industry. These methods were just
one of several innovations originating with the railroads that marked the transition from
traditional to modem business enterprise. Most important were the developments of J. Edgar
Thomson and his cohorts at the Pennsylvania Railroad. The work of these and other pioneering
accountants in the railroad industry was the subject of widespread public discussion and
numerous articles in the new financial journals of the day.

EMERGENCE OF COST ACCOUNTING.

Cost accounting was one of three interrelated types of accounting developed at the time, the
others being financial and capital accounting. Financial accounting addressed issues relating to a
firm's daily financial transactions, as well as overall profitability. For example, railroads began
deriving operating ratios in the late 1850s, which for the first time related absolute quantities of
profit and loss to business volume. Capital accounting addressed issues relating to the valuation
of a firm's capital goods. This was particularly important in the railroad industry given the
unprecedented quantities of capital involved and the problem of how to account for the repair
and renewal of capital.

Innovations in cost accounting followed those in financial and capital accounting. Cost
accounting involved the determination and comparison of costs among a firm's divisions or
operations. Thus the historical development of cost accounting accommodated the development
of the multidivisional firm towards the end of the 19th century. There was necessarily a
considerable amount of overlap among financial, capital, and cost accounting. For example, to
accurately determine unit costs, it was necessary to relate overhead costs and capital depreciation
to the volume of production. At the same time, unit costs were typically used to determine prices,
which in turn affected financial accounts. The separation of these types of accounting followed
their historical institutional separation. That is, until the innovations of E.I. Du Pont de Nemours
& Co. in the 20th century, financial, capital, and cost accounting operations were carried out in
relative autonomy within firms.

Cost accounting was first used by the Louisville & Nashville Railroad in the late 1860s. This
enabled the company to determine such measures as comparative cost per ton-mile among its
branches, and it was by these measures, rather than earnings or net income, that the company
evaluated the performance of its managers. The accounting methods developed by the railroads
were adopted by the first large manufacturing firms in the United States upon their formation in
the last quarter of the 19th century.

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