George Hillis Newlove
THE UNIVERSITY OF TEXAS AT AUSTIN (EMERITUS)

IN ALL MY YEARS: ECONOMIC AND LEGAL CAUSES OF CHANGES IN ACCOUNTING

“Changes are coming from within and from without, and concern over how to handle changes being pressed by divergent forces pervaded the 96th annual gathering of commercial bankers.”1 The idea of change affects all business and related professions. This short article suggests a few of the changes in business conditions that materially affected the evolution of accounting in hope that accounting historians will emphasize why changes in accounting occurred as well as when they were developed.

Household Economy as Factory Economy. During the reigns of the Tudors in England, the members of the Guilds took materials to their homes, where they spun yarn and were paid by businessmen (usu ally piece-rate) upon the delivery of the yarn. The businessmen needed to know that they were receiving all the yarn they were due for the material supplied to the workers, therefore, “standards of material cost” were developed early in the evolution of cost ac counting.2
As factory manufacture developed, the efficient use of the factory space and equipment became so important that production engi neers developed “scientific management.” The most prominent of these production engineers developed incentive methods of paying labor costs; these wage systems were named after the engineer who developed them.

S. P. Garner wrote that in 1887 “Garcke and Fells4 showed a thorough understanding of the accounting for materials, and that their system has been little improved on since that time. . . however, they were not so clear on the handling of overhead.”5 Garcke and Fells also treated very carefully the flow of labor costs through the ledger accounts, and were among the earliest cost accountants to recommend a strict tie-in between the cost accounts and the general accounts.6
Most of the voluminous writings of the production engineers who developed the subject Scientific Management, are found in the

Newlove: In All My Years: Economic and Legal Causes of Changes 41

Transactions American Society of Mechanical Engineers and in The Engineering Magazine (New York).

The evolution of the distinction between the outlays chargeable to factory inventories and outlays not so chargeable was shown to be long and involved by Garner.7 Two very important subjects in-volving factory overhead prior to 1920 were “interest as a cost” and the allocation of burden to production. In 1916, the literature on the subject of interest as a cost had reached such a stage that C. H. Scovell devoted a whole section of his Cost Accounting and Burden Application to the topic.8 In 1913, J. Lee Nicholson in his very famous textbook devoted four chapters to the allocation of burden costs to the special factory orders or to the product on its productive labor and machine (or process) method;9 this emphasis greatly exceeded the space devoted to the collection, analysis and control of burden.

Business Cycles. Before 1920, business slumps were largely caused by financial and currency troubles rather than by abnormal factory production. However, in 1921 the war production economy caused excessive inventories and Section 6 of the 1921 Yearbook, National Association of Cost Accountants contains six different articles under the general subject of The Distribution of Overhead Under Abnormal Conditions.

Up to 1900, idle factory time was the relatively unimportant result of breakdown in machinery, etc. In 1900-1901, A. Hamilton Church wrote a series of cost accounting articles that made him famous almost overnight.10 Church did an excellent job charging burden costs to the production factors and secured a reasonable periodic burden rate per machine hour: any unabsorbed burden in one period due to unusual idle time was charged to production the ensuing period. The theoretical errors in this procedure could be ignored if the number of idle hours was small and the concept of correct periodicity of costs had not yet become important; both conditions existed when Church proposed the use of a supplementary rate for idle time loss. However, by 1930 the conditions had changed and Church no longer advocated the use of the supplementary rate per hour for idle time loss.

Depreciation. With the increasing investment in factory buildings and machinery, came an increase in the emphasis on depreciation. In 1921, the American Institute of Accountants published a compre hensive 1578 page bibliography of accounting literature to Decem ber, 1920;12 pages 343 to 679 were devoted to depreciation, deple tion and obsolescence. Henry Rand Hatfield in the 22 pages de voted to the subject of depreciation in his classic book wrote a remarkable development of the mathematical and legal aspects as of 1909.13 In 1915, E. A. Saliers wrote 200 pages in the first edition of his Principles of Depreciation,14 but by 1939, the revised work (third edition) had increased to 481 pages.15 Treasury Decision 4422 several decades ago had a profound effect on the reporting of de duction for depreciation on income tax returns.

Inflation and Stabilized Accounting. The footnotes to Chapter 16, of Newlove and Garner, Advanced Accounting, Volume I, indicate that stabilized accounting, which reflects the financial effects of in flation, was pioneered by the work of H. W. Sweeney.

lncome Tax Law. The passage of the U.S. lncome Tax Law in 1913 had a remarkable effect on accounting procedures. Many of the important accounting topics of today are direct outgrowths of in come tax regulation, for instance: Retail method of inventory

Installment sales of merchandise18 and of real estate,19 Last-in, first-out method of pricing material requisitions.20 Business Budgets. While the underlying forecasts, which are tied-into the master schedules, may, for the sake of simplicity, be illus trated using data from a department store,21 they are often illus trated using factory data; Bartizal gave an unusually complete set of this factory data.22 G. A. Welsch in his very thorough study of the evolution of budgeting found the following:23

1. The first recorded description of the flexible budget was by John Mann in 1904 in an article on “on-cost” (or burden) in Volume 5 of Encyclopedia of Accounting (George Lisle, editor). This remarkable article developed the charges of a productive department for three different levels of activity and introduced the now well-known break-even point chart.

2. In 1922, J. 0. McKinsey (Budgetary Control) applied the principles developed in governmental accounting to individual business units. This publication is the first complete “benchmark” in the history of business budgeting.

3. A tabulation of the number of magazine articles on budgeting in the Industrial Arts Index showed no articles for the years 1913-1919, 13 for 1920-21, and 32 for 1922-1923. These articles were restricted to the static or fixed budget.

4. The first published article on flexible budgets as such was entitled “A Technique for the Chief Executive” by J. H. Williams (Taylor Society Bulletin, April 1922). This article is historically important because it presented a formula for separating the fixed and variable elements in semi-variable costs.

5. In 1928, H. W. Maynard wrote two articles on the interrelation of flexible budgeting and standard costs (The American Accountant, June 1928, and N.A.C.A. Yearbook—1928). Hugh Jackson wrote that the latter article is the first reference to flexible budgets in the publications of the National Association of Cost Accountants (N.A.C.A. Yearbook—1938).

6. The fluctuations in industry in the 1930’s and 1940’s greatly increased the interest in flexible budgets. Many magazine articles appeared and the following books were historically important: Walter Rautenstrauch (The Successful Control of Profits—Forbes, 1930); F. H. Rowland (How to Budget for Profit—Harper, 1933); C. E. Knoeppel (Profit Engineering—McGraw-Hill, 1933); J. H. Williams (The Flexible Budget—McGraw-Hill, 1934); and F. V. Gardner (Vari
able Budget Control— McGraw-Hill, 1940).

The difference between actual figures and budgeted figures may be analyzed either by formulas or by use of charts. Schlatter de-serves great credit for his use of graphs for flexible annual budgets, flexible monthly budgets, differential costs, effect of changing fixed expense on differential costs, and effect of change in volume on profit.

Uniform CPA Examinations Prepared by American Institute of Accountants. Prior to the preparation of a recommended uniform CPA examination in 1917, the various states gave their own exami nation and stressed the accounting problems of their important in dustries25 and legalistic accounting; the importance of legalistic ac counting may be judged from the excellent Legal Department that was run for over a decade in The Journal of Accountancy and from the chapters in advanced accounting texts on partnerships, receiver ships, statement of affairs, realization and liquidation account, and decedents’ estates. However legalistic accounting was still import ant in 1950 and Newlove and Garner devoted most of Volume 2 to their Advanced Accounting to these topics.

After the introduction of uniform CPA examinations, process costs, mathematics of fi nance, and standard costs tended to replace the emphasis on legal istic accounting.

Actuarial Mathematics for Accountants. The early books on math ematics for accountants26 used “i” and “j” for the effective interest rate per year and the nominal interest rate per year. Newlove and Garnerz7 chose to reduce all interest rates to an effective interest rate per payment period thereby reducing the number of annuity formulas involved and they secured amortization and accumulation tables with the figures ready for journalization (availability of a calculating machine was assumed).

FOOTNOTES

1 Burroughs Clearing House, Nov. 1970, pp. 21-23.

2 Ellis M. Sowell, The Evolution of the Theories and Techniques of Standard Costs, University of Alabama Press, 1973, Chapter 2. (Book photographic re production of dissertation accepted by University of Texas, May, 1944.)

3 Short discussion of the more important early wage systems with their underlying formulas (Taylor, Halsey, Rowan, Gantt, and Emerson) is given by G. H. Newlove and S. P. Garner, Elementary Cost Accounting, Boston: D. C. Heath and Co., 1941, pp. 141-149.

4 Emile Garcke and J. M. Fells, Factory Accounts: Their Principles and Practice, London: Crosby, Lockwood and Sons, 1887.

5 S. Paul Garner, Evolution of Cost Accounting to 1925, University of Alabama Press, 1954, p. 94.

6 Garner, ibid., p. 111.

7 Garner, ibid., pp. 122-142.

8 C. H. Scovell, Cost Accounting and Burden Application, New York: D. Appleton and Co.

9 J. Lee Nicholson, Cost Accounting Theory and Practice, New York: Ronald, 1913.

10 A. H. Church, “Proper Distribution of Establishment Charges,” New York: The Engineering Magazine, XXI and XXll (1901).

“A. H. Church, Overhead Expense, New York: McGraw-Hill Book Co., 1930, Chapter 13.

12 American Institute of Accountants. Accountants’ Index, New York: 1921.

13 Henry Rand Hatfield, Modern Accounting, New York: D. Appleton and Co., 1909,

14 E. A. Sallers, Principles of Depreciation, New York: Ronald Press Co., 1915.

16 E. A. Sellers, Depreciation Principles and Applications, New York: Ronald Press Co., 1939.

16 H. W. Sweeney, Stabilized Accounting, New York: Harper and Brothers, 1936.

17 G. H. Newlove, C. A. Smith, and J. A. White, Intermediate Accounting, Boston:

D. C. Heath and Co., 1939, Chapter 10.

18 G. H. Newlove and S. P. Garner, Advanced Accounting, Volume I, Boston: D. C. Heath and Co., 1951, pp. 465-478.

19 lbid., pp. 478-487.

20 Legalized under Revenue Act of 1938.

21 Newbve, Smith, and White, op. cit., pp. 530-538.

22 J. R. Bartizal, Budget Principles and Procedure, New York: Prentice-Hall, lnc., 1940.

23 Welsch, G. A . , The Theory, Construction and Uses of Flexible Budgets, Doctoral dissertation, The University of Texas, 1952, pp. 11-44.

24 C. F. Schlatter, Cost Accounting, New York: John Wiley and Sons, 1947, pp. 451, 464, 520, 527-529.

25 G. H. Newlove and L. A. Pratt, Specialized Accounting, New York: McGraw-Hill Book Co., 1925, and R. B. Kester, Accounting Theory and Practice, New York:
Ronald Press Co., 1921, Volume III.

26 e.g. C. E. Sprague and L. L. Perine. The Accountancy of Investment, New York: Roland Press Co., 1914, and H. A. Finney, Introduction to Actuarial Science, New York: American Institute of Accountants, 1920.

27 Newlove and Garner, Advanced Accounting, Volume I , op. cit., pp. 204-240.

(Vol. 2, No. 3, p. 6, 1975)