Theory of Constraints Handbook - James Cox Iii [240]
Identify the need for future research in accounting and finance to support TOC concepts, including the development of relevant performance evaluation systems.
The final section of the chapter will introduce the remaining chapters in this section of the TOC Handbook.
Traditional Cost Accounting and Business Environment
Cost accounting is designed and developed to help managers make decisions. When cost accounting’s assumptions mirror those of the organization, the information provided enables good decisions. Conversely, when accounting assumptions are not valid, managers make good decisions only by using their intuition or by chance and not by using the accounting information provided.
As the environment changes, internal accounting and reporting should be changed to reflect that new environment and provide information that is more relevant to managers. In most companies, as we shall see, this adaptation has not occurred or has greatly lagged changes.
Development of Cost Accounting
Accounting has been around since exchanges first began taking place, but until the 19th century, few people were involved in financial reckonings and internal accounting was mostly conducted visually by owners and managers. With the onset of the industrial revolution and the growth of large companies, accounting became more important and cost accounting began to be developed to control large organization chaos (Kaplan, 1984; Cooper, 2000; Antonelli et al., 2006; McLean, 2006).
Since the industrial revolution began first in Great Britain, their engineers and accountants were the first to recognize the need for cost/management accounting (Fleischman and Parker, 1997; McLean, 2006; Edwards and Boyns, 2009), but their accounting developments were not publicized (Fleischman and Parker, 1997). In the United States, modern cost/management accounting began in the late 19th and early 20th centuries (Tyson, 1993), especially with the introduction of mass production.1 The scientific management movement, supported by the theories of Frederick Taylor2 (1911, 1967), Walter Shewhart (1931, 1980), and Mary Parker Follet’s enlightened approach to management (Follett and Sheldon, 2003), drove the development of supporting cost/management accounting by engineers and accountants such as Alexander Hamilton Church (Litterer, 1961; Jelinek, 1980), who railed against “averaging” production overhead costs over all jobs or products produced and insisted that all production costs must be assigned to orders or products (Church, 1908). In a two-stage process, overhead typically is assigned first to departments and then to jobs or products passing through the department.
Business Environment, First Half of the 20th Century
Frederick Taylor’s theories, while not universally accepted, were widely believed and practiced by companies during the early decades of the 20th century (Kanigel, 1997). Business schools, including Harvard Business School (Cruikshank, 1987) began teaching Taylor’s scientific management.
By the 1930s, most large manufacturers had adopted some form of manufacturing overhead allocation, but standard costs and related detailed variance analysis did not come into widespread use until after World War II (Johnson and Kaplan, 1987). Rather than being developed to control manufacturing costs, the original purpose of variance analysis was to value inventories and derive income statement costs (Johnson and Kaplan, 1987). This is because generally accepted accounting principles (GAAP) require that actual (not standard) costs appear on the balance sheet and the income statement and standard costs, plus favorable variances or minus unfavorable variances, equal actual costs.
During World War II, the demand for war supplies fueled widespread implementation of mass production (Grudens, 1997). Following the war, companies rushed to fulfill pent-up consumer demand, and some companies used standard costs and variance analysis to control production costs (McFarland, 1950; Vangermeersch and