Basil S. Yamey
LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE
COMMON COSTS AND BUSINESS DECISIONS: AN HISTORICAL NOTE
Decision-making in business depends in part on a knowledge of costs and their structure and behavior. Yet in the literature of economics the analysis of costs in relation to business decisions does not go back far in time. The businessman would have looked in vain in Adam Smith’s The Wealth of Nations, 1776, for any helpful consideration of the issues involved. The intellectual sparring be— tween economists and accountants on the nature of costs and their significance for business decisions began only ill recent decades-on such matters as the indivisibility of certain costs and their allo cation among activities; the relevance of marginal rather than of average costs; the distinction between escapable and inescapable costs; and the significance of thinking in terms of opportunities foregone rather than of money costs incurred.
Almost contemporaneously with The Wealth of Nations, a treatise on bookkeeping and accounts was published which shows a lucid awareness of several of these critical issues, especially of the futility of attempting to allocate common or joint costs or of treating as a separate “profit center” an activity which is inflexibly and in separably linked with other activities. This book is Robert Hamil ton’s An Introduction to Merchandise . . ., 2nd edition, 1788, of which Parts IV and V relate to bookkeeping and accounts. The author, then professor of philosophy in the Marischal College, Aber deen, was also known for his contributions to political economy. He clearly had an intimate knowledge both of economic problems and also of business and accounting practice.
The interest of Hamilton’s discussion of the treatment of costs in accounts has been recognized in the literature on the history of accounting. Nevertheless it is worth recounting again what he said on the subject, by noting three examples. (a) He explains that “when the American trade was open,” ships built in the northern provinces were bought by English merchants, who usually after one or more voyages brought them to England for sale. Hamilton observes: “As the purchase of the ship and the success of the voyages are properly but one adventure, they are joined in the same accompt, and the gain estimated on the whole” (p. 405). (b) He ex plains the appropriate treatment of the importation of “a cargo of different kinds of goods which could not well be separated, such as iron and deals; of which the one is necessary for ballast, and the other to complete the lading . . . ”
A single account should be opened: “as we are obliged to import both together, it is the success of the whole that we should inquire into” (p. 408). (c) The example which has attracted most attention is the case of the linen manufacturer who buys “rough flax” and engages in all the successive processes which finally yield white linen. He explains that “if all these branches of business were necessarily connected, and the manufacturer had no other choice than to purchase the rough flax, and carry on the successive operations, it would be sufficient to keep his books in a form that should exhibit the gain or loss on the whole.” By contrast, however, “if he has an opportunity of beginning or desisting at any stage of the manufacture, his books should exhibit the gain or loss on each operation separately.” Even if he should choose to engage in all the operations, “it is proper that he should have a separate view of the success of each” (pp. 487-488).
Discussion of costs of this caliber are not to be found in book-keeping treatises before Hamilton (or indeed for a long period after him). Oddly enough, one of the very minor and partial exceptions to this generalization is provided by the first published exposition of bookkeeping, that by Luca Pacioli in his Summa of 1494. Pacioli advises that a merchandise expenses account be opened for expenditures each of which was incurred on behalf (collectively) of different lots or kinds of merchandise. He explains that it is tedious to spend time on small amounts anyway (“pero che de minimis non curat praetor”); further, if a single payment is made for the packing or transporting of a collection of various kinds of goods, “you can not determine the cost for each of these goods. And so is born that account called expenses of merchandise account. . .” (“. . . che non potresti a ogni mercantia carattare la sua spesa. E pero nasci questa partita chiamata spese de mercantia . . . “).
The points made by Pacioli about the charges-of-merchandise account can be found, separately or together, in later treatises. But it was not until Hamilton’s book that the discussion of costs and their relevance for known decisions was fully articulated and elaborated.
(Vol. 2, No. 1, p. 1, 1975)
