Managerial
accounting has its roots in the industrial revolution of the 19th century.
During this early period, most firms were tightly controlled by a few
owner-managers who borrowed based on personal relationships and their
personal assets.
Since there were no external shareholders and little
unsecured debt, there was little need for elaborate financial reports. In
contrast, managerial accounting was relatively sophisticated and provided
the essential information needed to manage the early large scale production
of textile, steel, and other products. After the turn of the century,
financial accounting requirements burgeoned because of new pressures placed
on companies by capital markets, creditors, regulatory bodies, and federal
taxation of income. Johnson and Kaplan state that "many firms needed to
raise funds from increasingly widespread and detached suppliers of capital.
To tap these vast reservoirs of outside capital, firms' managers had to
supply audited financial reports. And because outside suppliers of capital
relied on audited financial statements, independent accountants had a keen
interest in establishing well defined procedures for corporate financial
reporting. The inventory costing procedure adopted by public accountants
after the turn of the century had a profound effect on management
accounting. As a consequence, for many decades, management accountants
increasingly focused their efforts on ensuring that financial accounting
requirements were met and financial reports were released on time.
The
practice of management accounting stagnated. In the early part of the
century, as product line expanded operations became more complex, forward
looking companies saw a renewed
need for management-oriented reports that was separate from financial
reports. But in most companies, management accounting practices up through
the mid-1980s were largely indistinguishable from practices that were common
prior to world war I. In recent years, however, new economic forces have led
to many important innovations in management accounting. These new
practices are discussed in other chapters.