Richard Vangermeersch
UNIVERSITY OF RHODE ISLAND
THE DIAGRAM OF THE COST SYSTEM OF HANS RENOLD LTD. — A BLUEPRINT FOR ACCOUNTING FOR ROBOTS
Abstract: Knowledge of accounting history can be a great aid in solving accounting problems of today and tomorrow. One example of this is the use of a cost diagram of Church and Renold and the writings of Church to solve the problem of accounting for robots.
The purposes of this research note are the presentation of a diagram of an accounting system for a highly capital intensive firm and the illustration of the relationship that system has for the accounting for robots. This diagram was found in October, 1984 in the substantial archives of Renold Chains Limited in Wythenshawe (near Manchester) England, while I was conduct-ing a sabbatical research project on Alexander Hamilton Church. This research project is a follow-up on work I have been doing on the redesigning of cost accounting for companies using robots.
Church was an electrical engineer who became quite active in cost accounting at the turn of the 20th Century. He went from a two-year assignment with B. & S. Massey in Manchester to an assignment with Hans Renold from 1900 to 1905 [Urwick and Wolf, 1984, p. 116]. Church later resettled in the United States and wrote and practiced extensively in management, accounting, and industrial engineering until his death in 1936 [pp. 115-7]. Hans Renold, like Church, was chosen by Urwick as one of the first 70 pioneers of management [pp. 58-60]. Renold was also an engineer who was, as a disciple of F. W. Taylor, in the forefront of the scientific management movement in Great Britain. Renold and Church’s system was considered to be the foundation of modern scientific costing in Great Britain [pp. 58-9].
Only the first half of the diagram is shown in Figure 1, as the second half dealt with accounting for administrative and dis-
1The specifics of the Schwarzbach and Vangermeersch machine labor approach has been published in the two articles referenced at the end of this research note. Rather than showing and discussing this system again, I have concentrated on the historical backdrop of this system.
tribution charges under the heading of “G. E. C. — General Establishment Charges.”2 The figure has been redrafted as the original was worn. The key factor in the diagram was the determination of a machine rate per hour. The machine costs were included, in effect, as one of the four product costs instead of
Diagram of the Cost System
2Although Church was not included in the index for the archives of the Renold Chains Ltd. in England, there are many pieces of secondary evidence that Church was a major contributor to the diagram. The handwriting of the person who did the support work for the diagram was the same as noted in Hans Renold’s personal diary.
being included in overhead. This decision is quite in line with the importance in Hans Renold Ltd. of developing special purpose machines for the purpose of the automatic assembly of chains [Tripp. 1955, p. 86]. These machines are quite similar to a robot. Undoubtedly, Renold’s machines were the central feature of the company’s management system. The diagram also placed great stress on the control and assignment of floor burden, which was assigned on a square footage (per Q1) basis.
The machine rate per hour method of product costing was considered to be the greatest single step forward in costing technique [Urwick and Wolfe, 1984, p. 114]. Church developed this idea as a needed improvement to the practice of a general tack-on for overhead expenses to direct labor dollars, regardless of how many and what machines worked on a given job. He considered each machine, or group of coordinated machines, to be a production center [Church, 1908, pp. 27-45].3 He then designed a form which collected the following costs for each machine or group of coordinated machines: (1) buildings factor, (2) power factor, (3) lighting factor, (4) heating factor, (5) stores transport factor, (6) supervision factor, (7) organization factor, (8) interest, depreciation & insurance, (9) repairs and maintenance, (10) oil and allowance, and (11) tool room charge [Church, 1910, p. 128].
My colleague, Henry Schwarzbach, and I have given many presentations of our version of accounting for robots by the machine labor cost factor to engineers, accountants, and mana-gers for the Robotics Center of the University of Rhode Island and have always shown the diagram done by Church and Renold. We substitute the word “robot” for “machine” in the diagram and then present the diagram as the solution to the problem of accounting for the robotics world. Church and Renold’s Diagram of Cost System always draws great attention for these reasons. It is as visually appealing a graphic as I have seen in cost accounting. It was done by engineers, Church and Renold, who were renowned in the history of management. It solved the
3Church’s 1917 book, Manufacturing Costs and Accounts, gives his best writings on the machine hour rate method. His 1914 book, The Science and Practice of Management, contains his best writings on the machine as the focal point for a business. More information on Church is available in Vanger-meersch’s: (1) “The Wisdom of A. Hamilton Church,” Working Paper No. 63 of the Academy of Accounting Historians, (2) The Contributions of Alexander Hamilton Church to Accounting and Management, by Garland Press, and (3) “Alexander Hamilton Church, 1866-1936: A Man of Ideas for all Seasons” in a Random House pamphlet on notable accountants.
problem that almost all engineers, accountants, and managers have with the facts of a ever-increasing overhead cost of an ever-decreasing direct labor cost, resulting in a greater and greater overhead charge per direct labor dollar or hour. It recognized the importance of the machine in accounting and in management. It was an illustration of engineering input and, perhaps, dominance in cost accounting at the time. It showed that the machine hour rate method was put into practice, even through the bookkeeping complexities caused the system to be modified in the first part of the 1910’s [Renold, Sir Charles (Hans Renold’s son), 1950, p. 113].
Unfortunately, Church and Renold never realized that they had broken with the traditional three product costs (raw mate-rial, direct labor, and manufacturing overhead) with the machine rate concept. They really adopted a four product cost approach with the fourth product cost being machine labor. Robots cannot be successfully treated in accounting as a part of overhead but must have their costs collected as a separate product cost. Engineers of companies considering robots simulate production costs on four product cost type of cost system. These engineers are hampered by the traditional three product cost system of accounting and accountants. Schwarzbach and I have spent much time getting engineers and accountants to have dialogues about robotics and accounting. For instance, I once again used the Church and Renold system during my presentation at the National Association of Accountant’s Cost Accounting for the 90’s: The Challenge of Technical Change seminar in Boston on April 28,1986. The concepts of a “four product cost system,” “the glob of overhead,” and “machine labor” are all related to the pioneering work of Church and Renold [Vangermeersch, 1986, pp. 76-8]. Schwarzbach and I consider our efforts to shatter the traditional three product cost model to be a most important contribution to accounting practice and academics.
The flow of the product through the plant will also be matched by the cost accumulating at each robot utilized in the production route. There can be a much more exact modeling of costs of robots to match the actual flow than under the very general overhead charge of the traditional three product cost system. A tighter control of costs of robots will occur because these costs can be analyzed into fixed, semi fixed-semi variable, and variable costs per robot. The important savings in the use of floor space by employing robots is stressed in this system. The vastly improved data collection tools of today should diminish the bookkeeping problems that plagued Church and Renold’s system. The robot can be programmed to do much of its accounting for itself.
SUMMARY
A study of accounting history can lead to ideas that solve current problems, as in this instance. It is very helpful for readers and listeners to know that there is historical back-up for a proposed solution. This is especially helpful when the two people involved are both as renowned as Church and Renold. Their diagram shows a care in drafting that seems to have been lost in accounting as engineers have ceased inputing into cost accounting. The concept of the machine rate also has been lost in the last 40 years. If there ever was a topic that needs a historical backdrop, it is robotics. Robots are not a new experience. Robotics is as old as the Industrial Revolution. Much is to be gained from studying the history of man’s reaction to machines, in order to gain a back-drop for studying robotics. Church and Renold’s diagram gives one such a reaction.
REFERENCES
Church, A. Hamilton, The Proper Distribution of Expense Burden, Works Manage-ment Library, (London: The Engineering Magazine, 1908).
Production Factors in Cost Accounting and Works Management (New
York: The Engineering Magazine, 1910).
Renold, Sir Charles, “Management Accounts,” The Cost Accountant, September, 1950, pp. 108-28.
Schwarzbach, Henry R. and Vangermeersch, Richard, “Why We Should Account for the 4th Cost of Manufacturing,” Management Accounting, July, 1983, pp. 24-28.
, “Cost Accounting Rethought in ths Age of Robotics,” Robots 9:
Conference Proceedings: Current Issues, Future Concerns, Vol. 1, (Dearborn, Michigan: Robotics International of SME, 1985), pp. 17-41 through pp. 17-57.
Tripp, Basil H., Renold Chains: A History of the Company and the Rise of the Precision Chain Industry, 1879-1955 (London: George Allen & Urwin Ltd., 1955).
Urwick, Lyndall F. and Wolfe William B., The Golden Book of Management: A Historical Report of the Life and Work of More than One Hundred Writers, 2nd Ed., (New York: Amacom, 1984).
Vangermeersch, Richard, “Milestones in the History of Management Accounting,” Proceedings of Cost Accounting for the 90’s: The Challenge of Technological Change. (Montvale, New Jersey, National Association of Accountants, 1986), pp. 75-81.
