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Early Cost Accounting for Internal Management Control: Lyman Mills in the 1850's*

  • H. Thomas Johnson (a1)

This study of the accounting records of a mid-nineteenth-century New England textile enterprise sheds new light on the emergence of modern cost accounting as a specialized tool of management.

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1 Professor Chandler's comments on the emergence of cost accounting are found in his following works: Strategy and Structure (Garden City, N.Y., 1966), 174185; The Railroads: The Nation's First Big Business (New York, 1965), 98100; Pierre S. du Pont and the Making of the Modern Corporation, co-author Salsbury, Stephen (New York, 1971), 128135; “The United States: Evolution of Enterprise” (unpublished ms., September 30, 1970), sees. II and III.

2 Notable examples of the extensive literature on this issue written by accounting historians are: Littleton, A. C., Evolution of Accounting to 1900 (New York, 1933), chs. 20 and 21; Solomons, David, “The Historical Development of Costing,” in Solomons, D., ed., Studies in Costing (London, 1952), 136; and Garner, S. Paul, Evolution of Cost Accounting to 1925 (University, Ala. 1954), ch. 2. The orthodox view on cost accounting in the mid-nineteenth century was stated succinctly by Garner, Paul in his article, “Highlights in the Development of Cost Accounting,” in Chatfield, Michael, ed., Contemporary Studies in the Evolution of Accounting Thought (Belmont, Calif., 1968), 216–17: “During the decades 1820–1880 little can be found which is of interest in the development of cost accounting…. The absence of striking innovations is rather peculiar, since many lines of industry were rapidly gaining headway…. It is likely that most manufacturing firms simply modified the then familiar trading account to take care of the factory charges. The ordinary goal was, therefore, the derivation of an interim profit figure rather than the cost of production. Almost no firms had worked out the details of how to show the product flowing from one account to the other on the general ledger.” The cost records of Lyman Mills which are described herein present a considerably different view of mid-nine- teenth century cost accounting than the view which Garner outlines.

3 The text is Garcke, Emil and Fells, J. M., Factory Accounts (London, 1887). Garcke and Fells' cost system is described in Littleton, Evolution of Accounting, 348–353. Paul Garner states that the Garcke and Fells book “probably had more to do with the advancement of cost accounting practices than any other book ever published. [One of its most striking features was] the procedure for integrating the costing with the financial accounting. This matter had either been ignored, or vaguely mentioned, by previous authorities.” See Garner, “Highlights,” 217–18.

4 Littleton, Evolution of Accounting, 359–360.

5 Ibid., 350.

6 Garner, Evolution of Cost Accounting, 76–90.

7 These records, housed in Baker Library at the Harvard Graduate School of Business Administration, are described in Lovett, Robert W. and Bishop, Eleanor C., List of Business Manuscripts in Baker Library (Boston, 1969), 38. In the following notes, these records are referred to as “Lyman Collection,” with the Baker Library manuscript index reference given.

8 For historical information on the company's operations see Lyman Collection, A–2 (inside front cover) and Green, Constance M., Holyoke, Massachusetts: A Case Study of the Industrial Revolution in America (New Haven, Conn., 1939).

9 Lyman Collection, CA (general ledger) and CB (factory ledger).

10 In some years, particularly after 1887, the balances in the general ledger cotton accounts were written down to market when market values fell below original cost. These write-downs were charged against profits in the general ledger in the year affected, but were not recorded in the factory ledger.

11 Lyman Collection, LC and LT.

12 Lyman Collection, AM (overhead distribution sheets in the semi-annual accounts). Depreciation of manufacturing plant and equipment does not follow modern practice. Expenditures for plant, equipment and major renovations were generally charged to profit and loss in the general ledger in the year they were incurred. Such charges were not entered in the factory ledger and therefore did not affect the data in the company's cost of manufacturing statements (see below). Ordinary repair costs, however, were included in the overhead expense total.

13 Additional information on the transactions in these mill accounts will be supplied to interested readers on request.

14 Littleton, Evolution of Accounting, 325.

15 Lyman Collection, MAE (semi-annual).

16 Lyman Collection, MAE (monthly).

17 Lyman Collection, MAF (1886) and MAH-1 (1875). This method of estimating unit costs probably was not described in published sources before the late 1890's. See, for example, Nichols, William G., Methods of Cost Finding in Cotton Mills (Waltham, Mass., 1899), 818; and Hill, James G., “Various Systems of Computing the Costs of Manufacture,” Transactions of the New England Cotton Manufacturers' Association, 67 (October 5–6 1899), 132–37.

18 One hank equals 840 yards of yarn.

19 Lyman Collection, MAF.

20 Lyman Collection, PA and PB. For example, see letters from the treasurer to the agent dated December 8, 1884, February 4, 1885, February 19, 1885, May 23, 1885, November 13, 1885, and April 7, 1886 (PB–14 and 15).

* The research upon which this paper is based was financed by the Canada Council (research grant S69–1548)–the help thus received is gratefully acknowledged. I wish to thank also Mrs. Eleanor Bishop and Mr. Robert Lovett for assistance with the textile company records at Harvard's Baker Library; Professors Kevin H. Burley, Alfred D. Chandler, Jr., and Basil Yamey for their advice in the preparation of this article; and Dr. Elaine Bowe Johnson for editorial advice.

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Business History Review
  • ISSN: 0007-6805
  • EISSN: 2044-768X
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