Running head: HISTORICAL PERSPECTIVES OF MANAGERIAL ACCOUNTING 1

Historical Perspective of Managerial Accounting

Jeoffery Walton BE: 225

International College of the Cayman Islands

Instructor: Mwangi Ngamate

Abstract
For hundreds of years, managers have sought to know the profitability of their companies,

services, products, customers, and among other business related segments. This managerial

accounting information provides managers with a complete overview and drives them to make

decisions to drop, add, expand, close, emphasize on a particular product, location, or service in

order to maintain an overall profit for their company. The data can assist them in identifying
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business risks, so they may formulate a plan to circumvent or reduce the risks in order to

maintain stability and profitability for their organization.

According to Johnson and Kaplan (1991), accounting practices can be dated to thousands

of years, as it can be tracked back as far to ancient civilizations who kept their bookkeeping

records engraved on stone walls and tablets. About 500 years ago, the Venetian Monk Fra.

Pacioli, created the double entry journal recording of financial transactions. Those were times

when people began trading with one another. Before the early 19th Century, trade and exchanges

mostly occurred between individuals, rather than organizations. Therefore, there was little need

for managerial accounting in the early centuries as companies, managers, nor employees existed.
Managerial accounting is an accounting system that provides internal users with helpful

information and reports for planning, control, and decision making. The internal reports which

are compiled for managers and officers, are very detailed and have a special-purpose for specific

decisions (Weygandt, Kimmel, & Kieso, 2015). Companies aim to know how well they are

doing, so they can plan and implement for the future of their organization. The data supplied to

managers from managerial accounting, is the purpose for these specific management roles.
Managers also seek to know where to cut costs. The authors Garrison, Noreen, & Brewer

(2010) explain that this method is tied to the Theory of Constraints, as every organization faces

at least one constraint that should be managed properly and efficiently in order for the company
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to mitigate risks. Some business risks are, but not limited to, faulty or harmful products to

consumers, employees who may steal assets or gains access to unauthorized data, dysfunctional

information technology, strikes, and theft of intellectual property. This theory in managerial

accounting explains that organizations should focus on their weakest link and aim to eliminate,

replace, or strengthen the constraint in order to create the most benefits.

The term cost is used in many different ways in managerial accounting, as there are many

types of costs which can be suitable for a managers need in decision making. The first book on

cost accounting was written by Payen in 1817. He characterized the uses of journals and ledgers

and paved the way for accounting for raw materials, construction, labor, and cost of goods sold.

In his literature, he demonstrated how the total cost of goods produced could be reconciled with

expense items, such as wear and tear, interest, depreciation, and rent. He also illustrated how

goods moved from the manufacturing process to the warehouse and explained how to compute

the cost per units and allocation of production costs. In his writing, he included waste and

spoilage in the costs of inventory and showed the link between cost and financial accounting

(Garner, 1954).
According to Martin, (n.d.), during the late 1800s, many accounting firms were formed

throughout the US as the demand for bookkeeping increased due to new industries and

businesses being created. Textile mills, retail stores, steel mills, railroads, grocery stores, general

stores, bakeries, ice businesses, and creameries sought book-keepers to assist them in planning,

controlling, and providing information to managers, which would enable them to make well-

informed decisions for their organizations. In 1902 in New York, the accounting firms of

Lybrand, Ross Bros., Montgomery, and Ernst & Ernst in Cleveland, Ohio were formed. That

same year, the first consolidated balance sheet was issued by U.S. Steel.
In 1903, a huge step in the advancement and development of managerial accounting took

place, as a centralized accounting system was created showing the use of return on investment
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(ROI) by DuPont Powder Company. DuPont recognized the importance of looking at both

margin and turnover in assessing a managers performance. Margin and turnover are both vital

concepts from a managers perspective as changes in sales, expenses, and assets affect ROI.

Throughout the 1900s and 2000s many associations, boards, credentials and qualifications were

created in the light of DuPonts system, and innovative industries because of businesses and

firms relying on the information provided by managerial accounting (Martin, n.d.).

Every company, whether large or small, must have managers. They require information in

order to carry out three major activities planning, directing, motivating, and controlling.

Managers are required to plan, so that they can identify the best options that are most suitable for

their companys strategy and objectives. Finding the best alternatives allows managers to move

into new markets, expand geographic base, and create new and innovative products. Once they

receive the information that is derived from managerial accounting, they make their decision

based on the margins between potential benefits and costs (Garrison, Noreen, Brewer, 2010). At

times, some businesses make the decision to move forward into new markets, but end up not

being profitable due to information that was omitted from the planning stage, as unforeseen

situations had not been accounted for in the initial planning process. Formulating long and short-

term plans are imperative for companies to achieve their objectives.

In addition to planning, managers are required to direct and motivate people. These duties

are included in day-to-day activities and are put in place to help the company run smoothly in its

operations. The implementation of the plans occur in the process of the managers activities.

Daily sales reports is one type of managerial accounting data that is used in this stage (Garrison,

Noreen, Brewer, 2010). Managers view performance reports which compare sales, profits, and

expenses to help meet their targets. This falls under the control function in managerial

accounting. In this process, managers are able to see if they are on track with budgets and
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performance, then compare their plans to organizations actual performance. Using this method,

helps them to be more effective in their control of operations.

For example, in the Cayman Islands there are very little manufacturing companies and

industries that use process costing, however, as a service based economy our financial industry

uses the job order costing by providing financial services both locally and overseas. According

to the authors Miller-Nobles, Mattison, & Matsumura (2014), job order costing is used by

companies that manufacture unique goods in groups, or provide specialized services. With this

system, the cost is accrued for each unique group, or job. Specific to the Cayman Islands, some

examples include companies such as accounting and law firms. Both types of firms measure

direct labor costs by particular jobs or tasks. Technology software is used to keep track of time

spent by employees on tasks, clients, case work, etc.

All of the stages mentioned above should allow managers to run its companys operations

efficiently and effectively. However, there are many factors that can contribute to the failure of

companies even after they receive data from managerial accounting. In the business

environment, not every manager possesses the attribute of being able to make well-informed and

unbiased decisions. Furthermore, there are unforeseen external factors that may arise beyond an

organizations control, such as natural disasters or an economic downturn. For instance, shortly

after Hurricane Ivan (category five (5), many companies moved their operations from the

Cayman Islands due to the failure of timely basic infrastructural mechanisms, such as electricity

and water not being available for months on end in different parts of the island. No amount of

data provided by managerial accounting could have foreseen that area of weakness, but

obviously some companies did not have a plan for this uncontrollable risk.
Post Ivan, the break-even analysis with a target profit of zero, some companies concluded

that the cost of remaining far outweighed the benefits of leaving and moving to other
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jurisdictions. Their margin of safety exceeded expectations, therefore, lowered the risk of not

breaking even which resulted in substantial losses. Not only did companies and clients suffer,

but so did employees and their families which created a negative trickle-down effect on the

islands economy. As a result, managers need to be able to evaluate information they receive in

a critical manner in order to have a successful company. As mentioned previously, there are

some things that cannot be measured in dollars and cents, such as weather and natural disasters.

Even though, the quantitative measures that managerial accounting provides are rational, certain

factors should be included in the contingency planning stage to help manage risks when

companies are subjected to unforeseen circumstances.

Overall, managerial accounting has opened doors for businesses and countries to

construct a game plan. It has helped them in business planning, strategic development, and

internal monitoring as they face local and global competition. It illustrates what works, what

doesnt work and can help managers in making decisions in some areas, such as whether to

continue doing what they are doing, refine, revamp, rebrand, or relocate in order to move their

company forward in a profitable and stable financial state. Over time, managerial accounting

systems have created a positive impact to the global economy. With this information, managers

are able to identify and control business risks which need to be managed effectively in order for

an organization or country to meet its objectives and goals. A sophisticated managerial system

does not guarantee that risks will not infringe on a company or country, but it helps them to plan

and implement for the future accordingly. Managerial accounting data assists managers in

identifying possible risks, so that they can create a plan in order for the company to remain stable

and maintain good financial standing.

References
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Garner, P. (1954). Evolution of Cost Accounting to 1925. Tuscaloosa, AL: University of

Alabama Press.

Garrison, R.H., Noreen, E.W., & Brewer, P.C. (2010) Managerial Accounting (13th ed.). New

York, NY: McGraw-Hill/Irwin.

Martin, J.R. (n.d.). 200 years of accounting history dates and events. Management And

Accounting Web. Retrieved from:

http://maaw.info/AccountingHistoryDatesAndEvents.htm

Miller-Nobles, T., Mattison, B., & Matsumura, E. (2014). Horngrens Financial & Managerial

Accounting (Fifth ed.). Pearson Education

Thomas. H.J., & Kaplan, R.S. (1991). Relevance Lost: The Rise and Fall of Management

Accounting. Brighton, MA: Harvard Business Press.

Weygandt, J.J., Kimmel, P.D., & Kieso, D.E. (2015). Financial & Managerial Accounting (2nd

ed.). Hoboken, NJ: John Wiley & Sons.