A history of accounting techniques and developments

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Accounting goes as far back as early back as ancient Egypt where stone tablets give early depictions of a double entry bookkeeping system of accounts. Over five hundred years ago, Luca Pacioli, "the father of accounting" developed a basic double entry system of accounts. With this double-entry system traders could determine the results of the transactions they made in the market and could also determine their assets and debts.

However it was not until the 19th century where management accounting became a prominent role within businesses. The industrial revolution signified a period where the whole UK economy was going through a radical change due to the innovations of new ideas such as the steam engine which led to a massive increase in factories.

During the industrial revolution a lot of production was transferred from individuals to large companies (such as textile mills, steel factories, etc.). The whole production and selling of products consisted of several conversion processes which were all performed in these large companies. Conversion processes that formerly were supplied at a price through market exchanges became performed within one organization. A lot of internal transactions occurred as conversion processes supplied their output to a next process within the organization instead of selling their output on the market. Owners of these large companies devised systems to summarize the efficiency by which labour and material were converted to finished products. These early management accounting systems produced efficiency measures such as cost per hour or cost per pound produced per process and per worker. These measures were used to motivate and evaluate the workers and their managers.

In order to calculate the costs of a product, the direct labour costs and direct material costs (prime costs) of a product were summarized. At the end of the 19th century companies also included indirect costs (overhead's) when calculating the costs of a product. According to Church and Mann, most companies determined the indirect costs of a product as a percentage of the direct labour costs (Solomon, 1952). In 1910 Church wrote "it is a very usual practice to average this large class of expense (Indirect costs), and to express its incidence by a simple percentage either upon wages or upon time. That this plan is entirely misleading there can be very little doubt, because few of the expenses in the profit and loss account have any relation either to each other or to wages or to time. To rely upon an arbitrary established percentage... is valueless and even dangerous" (Church, 1910).

When determining the costs of a product, Church advocated dividing the factory into a series of production centre's (e.g. a machine and a group of workers). In this production centre method, the costs of each production centre are summarised. The hourly rate of each production centre expresses the total costs of the production centre per hour. The costs of a production centre are then loaded on to the work passing through it, at an hourly rate. (Solomon's, 1952).

Over time, there had been many evolutions in management accounting. One such change was the introduction of activity based costing (ABC).

Activity based costing was first introduced by Professors Robert Kaplan and Robin Cooper in 1987 as a chapter in their book accounting and management: A field study perspective. They presented activity based costing as a way to solve the problems of traditional costing systems, which were unable to determine the actual costs of production accurately. Their original focus was on the manufacturing industry where new technology and improvements had reduced the proportion of direct labour and material costs but increased the proportion of indirect costs. They knew a new system needed to be developed.

Recently activity based costing has grown in popularity due to four specific factors. One reason is the significant increase in manufacturing overhead cost. Another is that manufacturing overhead costs no longer correlate with the productive machine hours or direct labour hours. Still another reason for the growth of activity based costing is the increased diversity of products produced by a company and the diversity of customer demands. Finally, within a company, some products are being produced in large batches while others are only in small batches (Activity Based Costing). While this method tends to be more complicated, because of its accuracy, the procedure of activity based costing will most likely continue to grow in use for years to come.

One important organization which is using Activity based costing is the Crown Prosecution Service. ABC measurement was introduced primarily to address the need for a fair and equitable allocation of running cost budgets to Areas. Imbalances of staff distribution were common knowledge within CPS with many believing that those who shouted loudest got most, with other areas being disadvantaged. Use of ABC data offered the opportunity to distribute funds within CPS based on need related to workload, rather than precedent.

So, ABC, within the CPS, is used as a resource distribution system, rather than a resource determination system. This means that the core prosecution process on the majority of cases in CPS Areas is measured in ABC. However, the work in other parts of CPS outside Areas is not covered by ABC models. In contrast, a resource determination system attempts to capture all activity and attribute costs to all activities/functions within an organisation. In this way the overall cost of an organisation meeting its objectives and obligations can be assessed but this will generally require more ABC personnel and a much greater level of maintenance and updating.

In contrast Activity Based Costing provides CPS with a number of benefits.

-More equitable distribution of running cost resources/budgets to the 42 CPS Areas, based on their relative caseload and case type.

-More open, transparent (and speedy) system for allocating resources to a large number of stakeholders

-Meaningful performance management information for managers at all levels within the organisation, and beyond.

-Accurate operational costing on all aspects of CPS performance, and costing support for any "what-if" scenarios, or policy changes.

-Contributes on assurances to government and other bodies on CPS cost efficiency.

-Accurate costing of new proposals for CPS and support for business cases / benefits realisation work on all major change initiative projects and programmes.

-Identification and advice on the avoidance of inefficiencies within the CPS prosecution process.

-Essential information to other agencies (ABC is a leading contributor to CJS planning models) about the cost of common areas of concern - important in the Criminal Justice System where performance is often dependent upon other Agencies

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