Accountzng, Orgamzat~onsandSocwty, Vol 16, No 5/6, pp 405-438, 1991 0361-3682/91 $3 00+ O0

Printed m Great Brttam Pergamon Press plc

COST ACCOUNTING, CONTROl,LING LABOUR AND THE RISE OF

CONGLOMERATES

TREVOR HOPPER
Department o f Accounting and Financg University o f Manchester
and

PETER ARMSTRONG
School o f Management and Economic Studie~ Unitmrsity o f Sheffield

Abstract

Through a detailed crtttque ofJohnson & ~ ' s RelevanceLost, (Johnson, H. T. & Kaptan,R. S.,Relevance
Los~ TheRiseandFall of ManagenkontAccountDtg (Boston, MA Harvard BusinessSchool Press, 1987)),
based up¢~ labour htstorgs of control witlun North Americanfirms, this article identifiesmajor deficienctes
m conve~uonal histcmcal studms of cost and management accounting and offers possibihues for thetr
resoluuon. ARer n o e ~ the lunitatiom of ~ cost theory for the theorisation of ¢xgmummmsand
then- history, the paper argues that acommting controls were not a consequence of econonuc or
tedmclt~cal ~ lint rather were rooted m strugglesas firmsattempted to control laixaa, p r o c ~
m vinous epochs of capttalisucdeveaopmem Cost accounting developments are r~l~wdto the ~ of
internal subcgmtracung and craft control of ~ m early factories, the advent of '~cmntific"
Manasement and hcmmsenmedlabour and, post-1930, with an accord Ixtween prnnary sectors ~ ~ ~
O3tlmeati¢~, whtch led m an increased emphasis on ~ l y pnctr~ smoothing production and h ~
employnmnt patterns, and a shtR of eommmic l~mSUreSto secondary lalmur argl producer mark~ The
paper cotwdudesby m]gun~tlmt, in the cxmtext of today's g l ~ of capital,controls assooated wt~ ~
labour and capttal accord are being abandoned as corporauom expemnem with new ~ ~ ~
of control ~ are reflected m current fashtom m accounting research.

T r a d i t i o n a l m a n a g e m e n t a c c o u n t i n g h i s t o r y has
b e e n fixated o n a s e a r c h for origins, o n the
q u e s t i o n s o f w h o d i d w h a t first, a n d w h e n .
Preoccupied with invention, rather than with
diffusion a n d application, w r i t i n g s i n this g e n r e
h a v e b e e n r i c h i n n a r r a t i v e t e r m s b u t t h e y have
n e g l e c t e d to e x p l o r e t h e i m p o r t a n t linkages
b e t w e e n phases of accounting development
and their socio-economic context. Given the
b e l i e f that this p e r c e i v e d d e f i c i e n c y n e e d s to b e
addressed, then the recent marriage b e t w e e n
a c c o u n t i n g a n t i q u a r i a n i s m a n d the d o c t r i n e s o f
liberal e c o n o m i c s c o n s t i t u t e s a defintte
t h e o r e t i c a l advance. P r e m i s e d o n t h e n o t i o n
that c h a n g e s i n t h e f o r m s o f b u s i n e s s organlsa-
t i o n a n d c o n t r o l s y s t e m s are d r i v e n b y s e a r c h e s
for efficiency i n c o m p e t i t i v e e n v i r o n m e n t s ,
a c c o u n t i n g d e v e l o p m e n t is s e e n as a n integral
part o f thts e v o l u t i o n a r y process. J o h n s o n &
Kaplan's Relevance Lost ( 1 9 8 7 ) is t h e m o s t
t h o r o u g h - g o i n g e x e m p l a r to date o f this n e w
tradition. G i v e n t h e i m p a c t o f this w o r k i n
academic, c o n s u l t a n t a n d p r a c t i t i o n e r circles,
t h e r e are g o o d r e a s o n s for s u b j e c t i n g its
htstorical a n d t h e o r e t i c a l a d e q u a c y to t h e
closest s c r u t i n y , n o t least b e c a u s e t h e s e issues
may bear tmportantly on the prescriptive
message w h t c h J o h n s o n a n d Kaplan d r a w from
t h e i r v e r s t o n o f a c c o u n t i n g history.
In c o n f o r m i t y w i t h their e v o l u t i o n a r y m o d e l ,
J o h n s o n a n d Kaplan p o r t r a y t h e initial phases o f
cost a c c o u n t i n g d e v e l o p m e n t as a steady accre-
tion of knowledge and technique achieved by
practising engineers and managers in their

405
406 TREVOR HOPPER and PETER ARMSTRONG

searches for efficmncy As a result of this argue the thesis of R e l e v a n c e L o s t a r e better

process, they argue, virtually all of the con-
temporary techniques of management account-
ing w e r e in operational use by about 1920
Having reached this point, Johnson and Kaplan
then depart from their basic evolutionary
model to argue that many of the achievements
of this "Golden Age" have subsequently been
stifled by the influences of financial reporting
and academic teaching Thts theoretmal twist
enables the authors to launch a powerful attack,
from the historical ground of the 1920s, on the
inefficiencies resulting from the contemporary
teaching and practice of management account-
ancy Accountmg information systems of ques-
ttonable relevance are said to be used m a
mechanical fashion b y a generatton of American
executives brought up to manage "by the
numbers" This, in turn, is held responsible for a
decline in the international competitiveness of
American businesses, especially in relatton to
the Japanese. This message evidently strikes a
c h o r d with many practising managers, perhaps
because the inroads made by Japanese manufac-
turers are indisputable, perhaps because there
is some truth in the thesis of accounting
stagnation, but also, perhaps, because of the
implicit daemonisation of academics and financ-
tal accountants
Despite the respect in which Johnson and
Kaplan's w o r k must be held, the argument of
this paper is that their theory is flawed, their
history partial and some of their prescription
neglectful of the socto-economic condinons on
w h i c h the achievements of the 1920s
depended. In contrast to the social harmony
and Serf-equilibrating behaviour o f individuals,
firms and markets assumed in the transaction
cost framework employed by Johnson and
Kaplan, many of the historical events used to
understood through a "labour process"
approach to e c o n o m i c and industrial history, as
exemplified by writers such as Clawson (1980),
Gordon e t aL (1982), Littler (1982),
Montgomery ( 1 9 8 7 ) and Nelson ( 1 9 7 4 )
Recognising the need for a broader, more
critical, institutional analysis of capttahstic
development, ~ the core presupposition of this
perspective is that social and economtc con-
flicts arising from the modes of control which
characterise particular phases o f capttalisttc
development stimulate the creation of new
forms of control intended to ehmmate or
accommodate resistance and to solve the
associated problems of profitability These new
forms of control, in turn, decay, partly because
their competitive advantage disappears as a
consequence of their generalisatton and partly
because they give rise to new contradictions
and forms of resistance. Thus a labour process
approach, in contrast to one utilising trans-
action cost theory, stresses crisis rather than
continuity; contradmtion rather than internal
consistency; social and political conflict rather
than harmony; the m o n o p o l y p o w e r of corpora-
tions rather than serf-equilibrating competitive
markets, patterns of class formatton in specific
economtes rather than an atomised view of the
individual; and human agency m its cultural and
mstatutlonal setting rather than economtstic
reductlomsm
A re-exammation, along these "labour pro-
cess" lines, of Johnson and Kaplan's chosen
exemplars of effficiency-driven development
mdtcates that mid 19th century cost accounting
systems were employed to intensify labour in
response to increased competition as well as to
stimulate searches for efficiency. It reveals
accountmg's tmplication in the tightening of

tThts article does not cla,m to be umque m thts respect Other pertinent attempts include Armstrong (1985, 1987),
Hopwood(1987), Hoskm& MacVe(1986), Loft(1986), Merino & Netmark(1982), Miller & O'Leary(1987) and Tinker &
Neimark (1987) Many of these employ a theorettcal perspecttve dertved from the work of Foucault Such work has
mlluenced our own, but thts arttcle ts motivated m part by the destre to locate accountingwtthin a more explicit theory of
interests
 COST ACCOUNTING,LABOURAND CONGLOMERATES
managerial control through the destruction of
subcontracting and craft controls later in the
century, and it shows that a major feature of the
General Motors system o f the 1920s was the
insulation o f shareholders' dividends from
e c o n o m i c fluctuation by throwing the costs of
this o n t o the workforce. Because s o m e of these
usages of accounting information d e p e n d e d
u p o n a lack o f resistance from organised labour,
it is b y no m e a n s accidental that Johnson and
Kaplan's a p o g e e o f m a n a g e m e n t accounting
d e v e l o p m e n t was also an age of anti-union
w o l e n c e and espionage. The c o n t e m p o r a r y
implicatton is that certain o f the "relevances" of
1920s' a c c o u n t m g control systems can only be
r e s u r r e c t e d in c o n t e x t s w h e r e the resistance of
labour is weakened.
A labour process approach is also useful in
reassessmg J o h n s o n and Kaplan's thests of
accounting stagnation, according to which the
influence o f financial accountants and academ-
ics was sufficient to arrest the d e v e l o p m e n t of
m a n a g e m e n t a c c o u n t a n c y for o v e r sixty years
within the m o s t dynamic e c o n o m y in the
capitalist world. Here, the historical record
suggests that the post-1930s' decline of inter-
est in accounting for process efficiencies was
actually the p r o d u c t of the N e w Deal era, in
w h i c h trade unions w e r e far m o r e able to resist
lay-offs and the speed-up, and o f increasing
industrial concentration which enabled
e m p l o y e r s to displace the costs o f welfarist
e m p l o y m e n t strategies o n t o semi-monopolised
p r o d u c t markets. In this n e w socio-economic
context, the relevance o f budgetary controls
m a y have changed, rather than declined Cost
accounting c a m e to b e used as the instrument
o f m o n o p o l y pricing policies designed to
p r o t e c t a partial accord b e t w e e n capital and
certain sectors o f the labour force. H o w far this
a c c o r d will persist into the 199Os is an o p e n
question, but to the extent that tt does so, there
m a y b e resistance to Johnson and Kaplan's call
for a reassertion of accounting for process
efliciencies
407
TRANSACTION COSTS AND THE
DEVELOPMENT OF MANAGEMENT
ACCOUNTING: A CRITIQUE OF THE
THEORETICAL FRAMEWORK OF
"RELEVANCE LOST"
Relevance Lost ts not considered h e r e from
the standpoint of managerial prescription; the
reader can find this elsewhere ( e g. Noreen,
1987) Rather, the c o n c e r n is with the partial
nature of the interpretations of history which
underlie tts thesis Since this p r o b l e m stems, m
part, from certain inadequacies in the transac-
tion cost framework e m p l o y e d b y Johnson and
Kaplan, it is necessary to review these before
p r o c e e d i n g to matters of histortcal substance.
Most of the p r o b l e m s stem from the assump-
tion in transactton cost theory that changes in
orgamsational forms and control systems are
universally driven by searches for efficiency,
whereas it is an elementary feature of capitalist
e c o n o m i c life that there are also gains to be
made from the extension and intensification of
labour and from the monopolisation o f p r o d u c t
markets. In fact it ts only fair to point out that
the fine detail of Johnson and Kaplan's history
often does acknowledge issues of labour
intensification and m o n o p o l y - - see, for exam-
ple, the DuPont case study (Johnson, 1975).
The critique which follows, therefore, is not a
wholesale challenge to their factual account
but, rather, to their broadbrush interpretation
The contract image o f organisation
Basically, transaction cost theory
(Williamson, 1970, 1975) asserts that the
concentration of diverse e c o n o m i c activities
within large corporations is viable only w h e n
managerial c o o r d i n a t i o n of these achieves
significant economies, as c o m p a r e d to the
aggregate result w h e n the same operations are
separately managed and co-ordinated through
market transactions. The costs of securing co-
ordinatton are called "transaction costs". The
potential for gains from r e d u c e d transaction
408 TREVOR HOPPER and PETER ARMSTRONG
costs m seen as c r e a t m g opportunities for both
increased profits and r e d u c e d p r o d u c t costs.
Simultaneously, therefore, they explain the
expansion of capitalist enterprises into func-
tionally related activities, and the success of
those companies w h i c h do so. Moreover, they
are held to explain innovattons in systems of
organisation and accounting which achieve
further i m p r o v e m e n t s in managerial co-ordina-
tion
Transaction costs, evidently, bear a great
weight of explanation in the theory. Yet as
P e r r o w ( 1 9 8 1 a ) has p o i n t e d out, it ts far from
clear w h a t they are. Whilst it is clear enough
that there are gains to be achieved from
combining single-activity enterprises, with the
object o f eliminating their separate profits, it is
clear that Williamson and his followers see the
r e d u c t i o n of transaction costs in m u c h broader
terms, This is achieved b y visualising all
relationships of organisational co-ordination as
contracts. T h r o u g h this device, the act of
settling the f o r m o f o n e of these "contracts" can
b e seen as a transaction. O n this basis it ts
claimed that there is potential for reduced
transaction costs in devising i m p r o v e d systems
of organisation and co-ordination.
Setting aside the neglect of p o w e r relauon-
ships implicit in the contract tmage of organis-
ation, it is still not clear that even this extended
definition o f a "transaction" can c o v e r all
i m p r o v e m e n t s in co-ordination, let alone all
increases in efficiency. For example, h o w can
clatms that c o r p o r a t e managers may achieve
i m p r o v e d investment decisions, as c o m p a r e d to
capital markets, b e described as a reduction in
transaction costs~
Williamson & Ouchi's answer to these points
( 1 9 8 1 ) c o n c e d e d that transaction costs have
n e v e r b e e n formally defined but claimed that a
definition could b e adequately approached
through a series of illustrattons. This weak reply
reinforces the impression that the p r o b l e m ts
fundamental. Possibly for this reason, Johnson
and Kaplan make no a t t e m p t to resolve the
issue, and so transaction cost theory m their
hands stmphfies to the " c o m m o n s e n s e "
hypothesis that d e v e l o p m e n t s in forms of
organisation and accounting are driven by
searches for efficiency Whilst still contentious,
this at least has the virtue of intelligibility.
The assumption o f competitive markets
Transaction cost theory is based o n the idea
that, m o r d e r to be successful, managertal co-
ordination must compete with market coordina-
tion. Tacitly this assumes competitive p r o d u c t
markets. O f all the areas of e c o n o m i c debate m
which this assumptton mtght b e made, that on
the formation of giant mtegrated corporations
must be just about the least appropriate Using
case material, P e r r o w ( 1 9 8 1 a ) has made the
obvious point that acquisitions and mergers
may b e carried out with m o n o p o l y profits in
view, rather than gains from efficiency. In fact
Nelson ( 1 9 5 9 ) has shown that the majority of
mergers m the great wave of 1 8 9 5 - 1 9 0 4 w e r e
horizontal, rather than vertical, and that m o s t
resulted in corporations which dominated thetr
p r o d u c t markets
Williamson & Ouchi ( 1 9 8 1 ) reject thts
argument on the dubious and irrelevant
grounds that any costs to the public arising
from "modest" increases in market power, are
m o r e than offset b y the gains in efficiency
possible in large monopolistic corporations.
Significantly, Chandler's c o m m e n t on the issue
( 1 9 8 1 ) avotded a defence of transaction cost
theory as such. Nevertheless, he sought to
maintain the n a r r o w e r thesis that managerial
co-ordination was vital to the competitive
success of m e r g e d corporations on the grounds
that only those horizontally-merged companies
which w e n t on to achieve the additional
e c o n o m i e s of vertical integration w e r e ulti-
mately successful. Logically speaking, even this
argument is unconvincing, since one might
construct a reverse chain of causality; namely
that managerial hierarchies and controls are a
c o n s e q u e n c e of firms moving closer to mono-
poly and that m o n o p o l y profits are essential to
the success of managerial control in vertically
integrated enterprises
Whatever the eventual o u t c o m e of these
debates, tt is clear that they have m o v e d on
from blanket assumptions of competitive
 COST ACCOUNTING,LABOURAND CONGLOMERATES
markets (Perrow, 1981b). It seems established
that theories of the real-world d e v e l o p m e n t of
large organisations, and of the role of accoun-
ting therein, n e e d to take account of monopoly.
In this vein, this p a p e r will argue that the
p u r p o s e of budgets in "core" corporations
gradually changed after the 1930s, to b e c o m e
an instrument of m o n o p o l y prtcing policies
w h i c h created the basis for an a c c o m m o d a t i o n
b e t w e e n e m p l o y e r s and certain sectors of the
labour force.
Microeconomics as social theory
The contract image of organlsational relation-
ships and the assumption of competitive mar-
kets are special cases of a m o r e general
intellectual m y o p i a in transaction cost theory.
As Robins (1987, p. 75) has argued.
Although transaction~cost theory offers powerful tools
for understanding the tmphcattons of specific soctal
mstttuttons for economic acuwty, it is incapable of
explaining historical tramformauons m those m s u m .
Uons The transacuon-cost approach ulttmately is an
extenston and apphcauon of micro-econormc theory,
and tts capactty to describe reahty is bounded by the
hmtts of the theory m that is, by the very mstituttonal
constraints that [it] would attempt to explain.
The transaction cost approach thus stands
accused o f trying to make history backwards by
rationalising past events through the insti-
tutional lenses o f the present, particularly in its
assumption that all organisational relationships
can be visualised as market transactions. By
means o f this device, all is explained by the
conventions o f m i c r o e c o n o m i c s to the exclu-
sion of social and political factors. But, to quote
Robins o n c e again, "the history o f nineteenth-
century d e v e l o p m e n t s is less a story of hier-
archy displacing markets than a tale of social
and political centralisation creating the condit-
ions for large-scale p r o d u c t i o n of goods
(Knowles, 1967)" (Robins, 1987, pp. 76-77).
The p r o b l e m with an inordinate reliance upon
transaction cost theory is that important
aspects o f history are excluded along with
divergent e c o n o m i c perspectives. The danger is
that history b e c o m e s written as an extension of
409
c o n t e m p o r a r y dominant ideologies, sanitised of
discomforting explanations of capitalistic dev-
e l o p m e n t and the role of large corporations,
educational institutions and the state. By neg-
lecting an examination of alternatives foregone,
such history blinds rather than enlightens by
portraying the status quo as inewtable.
Contro~ efficiency and effort
Transaction cost theory confuses gains from
increased effort with those from mcreased
efficiency In consequence, it confuses mana-
gerial controls aimed at increasing effort levels
with those directed towards increasing process
efficiencies This t e n d e n c y is at its m o s t visible
in Williamson's (1975, 1980) treatment of the
e m p l o y m e n t contract. In law, this is incomplete
in the sense that the e m p l o y e r formally
receives, not a set amount and type of work, but
the right to direct labour ("labour p o w e r " in
Marxist terminology). Williamson attempts to
explain this form of contract, and the conse-
quent apparatus of control o v e r the labour
process, as a minimisation of transaction costs,
from which b o t h parties benefit. In this manner
a tacit assumption is imported into the theory,
that managertal control is directed solely to-
wards t m p r o v e m e n t s in efficiency rather than
increases in effort levels.
According to Williamson, variations in the
precise task to be p e r f o r m e d and difficulties of
monitoring the possibility o f opportunist
behaviour on the part o f workers make the
negotiation of contracts covering all possible
contingencies e x t r e m e l y costly. Thus a form
o f contract in which employers have the
right, within limits, to allocate tasks and specify
effort levels is seen as a less costly alternative,
from which b o t h parties can benefit. In part-
icular, the individual worker's lost opportun-
ities for mtsappropriation and shirking are
clmmed to be m o r e than c o m p e n s a t e d by the
gains from preventing others from doing so.
Thus authority relationships within the firm are
depicted as the o u t c o m e of a notional process
of rational e c o n o m i c exchange b e t w e e n work-
ers and the firm, in which output efficiency is
maximised.
 410 TBEVOR HOPPER and PETER ARMSTRONG
T h i s fanciful a n d i n d i v i d u a l i s t i c g e n e s i s
n o t a b l y g l o s s e s o v e r t h e issue o f w h y t h e
c l a i m e d e c o n o m i e s in t r a n s a c t i o n c o s t s s h o u l d
b e a c h i e v e d b y a s s i g n i n g t h e r i g h t t o fill in t h e
g a p s in t h e e m p l o y m e n t c o n t r a c t t o capital
o w n e r s h i p , in t h e p e r s o n o f t h e e m p l o y e r ,
r a t h e r than, say, t o e l e c t e d r e p r e s e n t a t i v e s o f
t h e w o r k f o r c e . M o r e , it b u r i e s all o f t h e gains t o
capital from the right to direct labour within a
n e u t r a l - s o u n d i n g r e d u c t i o n o f t r a n s a c t i o n costs.
M a r g i n s o n ( 1 9 8 6 , p. 5 ) has c o m m e n t e d :
The concept of efftctency utthsed by Wtlharuson and
Aoki ts not well specifietL An increase m eflictency can
be defined as an mcresse m output for given inputs
However there ts no certainty that m the case of labour
mput the last condition will hold A strengthening of
hterarchy can result in an increase of labour input,
through the extracuon of labour effort, as well as an
mcrease m output. The eflictency tmphcauons of
strengthening hterarchy are indeterminate - - both
inputs and outputs could have increased Hence the
argument (Williamson, 1980) that the existence of an
anthonty relatton can be taken as evtdence of enhanced
efficiency m achtevmg common goals can be confronted
with a plausible alternative hypothesis luerarchy
reflects the abthty of those who own and control the
firm to ensure that their goals dominate the goals of
those employed m the firm Supporting evtdence for flits
alternaUve hypothesis can be drawn from the work of
Marglm (1974), Pollard (1965) and Thompson (1967)
who tllustrate how the msttmtton of hierarchy through
the factory system had tts origins m a search by
employers for more effecttve means of coercing
workers to work. Factory orgamsauon was associated
with worlang more days of the week, longer hours m
the day, and more mtenstvely
T h e s e c o m m e n t s i n d i c a t e t h a t an a d e q u a t e
history of capitalist forms of organisauon w
i n c l u d i n g t h e r o l e t h e r e i n o f a c c o u n t i n g inform-
ation -- needs to take cognisance of their part
in t h e e x t e n s i o n a n d i n t e n s i f i c a t i o n o f l a b o u r , as
w e l l as o f t h e i r a b i l i t y t o p r o m o t e t e c h n i c a l
p r o c e s s eflficiencies.
Accounting information and the rational
decision-making model of management
T h e t r a n s a c t i o n c o s t v i e w o f m a n a g e m e n t as
a s e a r c h for p r o c e s s efliciencies has c o n s e -
quences for Johnson and Kaplan's conception
o f t h e m a n a g e r i a l r o l e o f a c c o u n t i n g inform-
ation. T h e r e i n it is s e e n as d a t a t o b e f e d i n t o a
rational decision-making process Thus the
quality of managerial decisions on production
p r o c e s s e s a n d r e s o u r c e a l l o c a t i o n is s e e n as
d e p e n d i n g fairly s t r a i g h t f o r w a r d l y o n t h e u m e -
liness, a c c u r a c y a n d r e l e v a n c e o f c o s t inform.
ation. W i t h i n this s c h e m a , c o s t d a t a a r e s e e n in
realist t e r m s . J o h n s o n a n d K a p l a n w r i t e fre-
q u e n t l y o f t h e " a c c u r a c y " o f c o s t s or, o n t h e
n e g a u v e side, o f t h e i r " d i s t o r t i o n " . W h i l s t
s t r e s s i n g t h a t c o s t d a t a n e e d to b e a p p r o p r i a t e
t o t h e d e c i s i o n s t o b e taken, t h e y n e v e r t h e l e s s
b e l i e v e that, w i t h i n t h e p a r a m e t e r s o f rele-
v a n c e , t h e q u a l i t y o f c o s t d a t a is i m p o r t a n t l y
d e t e r m i n e d b y its a c c u r a c y .
If, o n t h e o t h e r h a n d , m a n a g e m e n t is t a k e n to
be about the control of labour and of junior
m a n a g e r s , t h e issue l o o k s different. F r o m this
p e r s p e c t i v e , a c c o u n t i n g i n f o r m a t i o n is t o b e
j u d g e d b y t h e r e s u l t s w h i c h it achieves, r a t h e r
t h a n its n o t i o n a l a c c u r a c y . T o t a k e a familiar
e x a m p l e , t h e classical l i t e r a t u r e o n t h e b e .
h a v i o u r a l a s p e c t s o f b u d g e t s (e.g. Caplan, 1971 )
d i s c u s s e s t h e effects o f s e t t i n g t a r g e t s at v a r i o u s
levels o f difficulty, n o t w h e t h e r t h e s e levels a r e
" c o r r e c t " in s o m e essential sense. O n this view,
t h e a c c u r a c y o f b u d g e t s a n d i n t e r n a l attribu-
t i o n s o f c o s t m i g h t b e r e g a r d e d as i r r e l e v a n t , s o
l o n g as t h e y s e r v e t o focus m a n a g e r i a l effort m
the directions desired by those who control the
o r g a n i s a t i o n J o h n s o n a n d Kaplan d e p r e c a t e t h e
a l l o c a u o n o f o v e r h e a d c o s t s o n t h e basis o f
direct labour expended, on the grounds that
this p r a c u c e o v e r s t a t e s t h e c o s t s o f labour-
intensive processes, thus leading to unsound
s t r a t e g i c d e c i s t o n s . But this a s s u m e s that stra-
tegic decisions on the product mix are perma-
e n t l y o n t h e agenda, w h e r e a s t h e r e m a y b e
p h a s e s o f c a p i t a l i s t d e v e l o p m e n t w h e r e this is
not the case Given the monopoly power of
c e r t a i n A m e r i c a n c o r p o r a t i o n s in t h e d a y s
b e f o r e t h e p a m c o v e r J a p a n e s e c o m p e t i t i o n , for
example, product costings seem to have had
m o r e significance for p r i c i n g p o l i c y t h a n for
m a n u f a c t u r i n g strategy. M o r e o v e r , e v e n w h e r e
competiuon places cost reduction on the
agenda, t h e r e is s o m e t h m g t o b e said for t h e
i n a c c u r a c y o f t r a d i t i o n a l furl-costing systems,
 COST ACCOUNTING, LABOUR AND CONGLOMERATES
since these serve to direct managerial efforts to
cut unit labour costs towards labour-intensive
processes, which, as will appear in this paper,
are precisely w h e r e resistance from labour is
likely to b e at its weakest.
Explaining accounting stagnation
Much of the rhetorical force of Johnson and
Kaplan's version of m a n a g e m e n t accounting
history derives f r o m the fact that it contains a
contradiction. If the search for gain from
r e d u c e d transaction costs was sufficient to
drive the evolution o f organisational forms and
accounting systems u p to the mid-1920s, w h y
did this process cease thereafter? Necessarily
answers have to b e i m p o r t e d from outside the
transaction costs framework. Johnson and
Kaplan find t h e m in the imposition of financial
reporting conventions on management
accounting t e c h n i q u e b y professional account-
ants and a takeover o f research by academics
interested only in abstract simplified problems.
Thus Kaplan's diatribe against the shortcomings
of c u r r e n t m a n a g e m e n t accounting is recon-
cried with Johnson's optimistic v i e w o f the
a u t o n o m o u s evolution of c o r p o r a t e forms and
accounting technique. Into the bargain, plaus-
ible culprits are produced, since not even their
best friends could p r e t e n d that accountants are
not p r e o c c u p i e d with financial reporting or that
academics are not academic.
Whilst this m a y constitute a solution to the
logical p r o b l e m s created b y framing accounting
history within transaction cost theory, there
remains an air o f unreality about it To reduce
such accounting p r o b l e m s to accountants, be
they academics or practitioners, seems to be a
case of blaming the m o n k e y rather than the
organ-grinder. W e are asked to believe that the
c o m p a r a t i v e l y m i n o r vested interests of
accountants and academics have b e e n able to
i m p o s e their intellectual habits u p o n manage-
m e n t practice in America's giant corporations
for o v e r sixty years, to the considerable detri-
m e n t o f their profitability. In fact, the indepen-
d e n t influence o f accounting professionalism on
c o r p o r a t e practice m a y well have b e e n mini-
real, b o t h in the v i e w o f c o n t e m p o r a r y obser-
411
vet's (Berle & Means, 1933, p. 2 0 2 ) and m o d e r n
accounting historians (Merino & Neimark,
1982). Speaking during the 1930s, Landis o f the
SEC had this to say:
The tmpact of almost dady uits with accountants, s o m e
of them called leaders m thetr professton, oRen leaves
httle d o u b t that thetr loyalittes to m a n a g e m e n t are
stronger than thetr sense of responstbfltty to the
investor (Carey, 1979, p 2 6 2 )
As against the questionable thesis o f financial
a c c o u n t m g dominance, it is important to con-
sider the possibility that the cost accounting
systems which stand accused of f a i l i r l g
American enterprise have actually persisted
because they have s o m e offseRing managerial
advantage which lies b e y o n d the grasp of
transaction cost theory. By considering the
evolution o f accounting systems as an aspect of
overall changes in the pattern of control of the
labour process, the present p a p e r attempts
precisely this.
Social transformation and management
accounting technology: towards a labour
process approach
Johnson and Kaplan are not unaware of the
relevance of the capital-labour relationship to
the operation of accounting information sys-
tems Noting that early cost accounts w e r e
c o n c e r n e d with labour control, they remark
that "arguments about the causes, costs, and
possible benefits to workers o f surrendering
control o v e r their labour in return for a fixed
income have a b o u n d e d since Ricardo and
Marx" (Johnson & Kaplan, 1987, p. 22). But the
concerns of political e c o n o m y are cast aside
w h e n they self.consciously limit their remit to
"the implications for accounting of the compli-
cations that factory managers faced o n c e
workers w e r e e m p l o y e d at a wage" (ibid. p.
22) The implication appears to be that the
p r o b l e m s of securing compliance from the
workforce are sufficiently addressed through
the institution of the wage relationship, leaving
managers flee to search for process efficiencies.
The notion that the p r o b l e m of extracting w o r k
from the workforce cannot be solved on a
412 TREVOR HOPPER and PETER ARMSTRONG

once-for-all basis, and that it actually lies at the
root of many of the "comphcations" for
accounting, is thus excluded from considera-
tion.
It is this questionable intellectual procedure
which underlies Johnson and Kaplan's theorisa-
tion of changes in management control and
capitalistic development through transactton
cost theory In this vein, it is stated as fact that
"the goal of the scientific management engin-
eers, such as Frederick Taylor, was to improve
the efficiency and utilisation of labour and
materials" (Johnson & Kaplan, 1987, p. 10). This
ts demonstrably partial, since Taylor himself
stated that his system was a means of elimin-
ating "systematic soldiering" (group output
restriction) on the part of the workforce
(Taylor, 1903). More generally, the notion that
searches for efficiency under the pressure of
competitive markets were the primary drtve
behind the development of capitalistic organ-
tsations and scientific management is tughly
contenttous and has been strongly disputed by
historians and radical political economtsts, e.g
M o n t g o m e r y ( 1979, 1987), Braverman (1974),
Clawson (1980), Nelson (1974). I n t e r alia, all
of these writers reject technologmal determin-
tsm and e c o n o m i c imperatives as a satisfactory
basis for explaming changes in the modes of
management control. In contrast to the assu-
med self-equtlibrating behaviour of firms and
markets and the social harmony trnplictt m
transaction cost research, they describe h o w
social conflicts w e r e e m b e d d e d m histormal
changes and h o w instttutions such as the state
and trades unions helped to shape controls at
the point of production. Transaction cost
theory tends to deflect attention from such
tssues rather than shed light on them
It also tends to portray technological change
(in this case, of management accounting sys-
tems) as the p r o d u c t of a continuous evolution-
ary selection of more efficient forms, rather
than as discontinuous, and crisisMriven
(Schumpeter, 1942). In this vein, Johnson and
Kaplan portray accounting developments up to
the mid-1920s as a steady accretion of know-
ledge and practice spurred on by firms and
individuals operating within competitive and
self-equilibrating markets. Such assumptions are
called into question by the accumulating evi-
dence ( s o m e of which will be reviewed in this
paper) that new technologies and orgamsa-
tional forms are partly responses to problems of
capital accumulation and labour control. Clear-
ly, a comprehenstve historical analysis of
management accounting along these lines is
beyond the remit of a single paper. What
follows, therefore, ts an attempt to sketch out
the form of such a history, focusing upon h o w
management accounting has developed in rela-
tion to the control of labour within increasingly
concentrated p r o d u c e r markets m North
America. 2
A LABOUR PROCESS APPROACH TO THE
DEVELOPMENT OF SYSTEMS OF
ORGANISATION AND ACCOUNTING
Johnson and Kaplan analyse a perceived crisis
in management accounting by examining its
historical origins In a notable advance on the
'~who did what first?" school of accounting
history (see Flamholz's 1983 c o m m e n t s on
Johnson's earher work), they relate the early
development of cost accounting to the evolu-
tton of orgamsational forms w h i c h took place in
American industry between 1850 and 1930.
This development is analysed wtthin the frame-

2 Tilts paper ts dtrected at the issues rinsed m the opemng paragraph, namely how management accounting developments
have been related to the control of labour The paper dehberately concentrates upon manual labour m manufacturing
orgamsattons It does not exanune how costing was assoctated wtth the growth of management and tts control as a labour
process, or the role of accountingknowledgeand business schoolsm reproducmg and legttamatingmanagement The paper
also concentrates almost exelustvely on North Amertcanbusiness history It does not seek to deny that, Inter alia, due to
different cultures, state acttons and patterns of class forrnatton, accounting developments elsewhere (e g. Germany,Japan
and the U IC) have been stgndicanflydifferent Some dtscusston of these points can be found m Hopper (1990)
 COST ACCOUNTING, LABOUR AND CONGLOMERATES
w o r k o f transaction cost theory (Williamson,
1970, 1975) and is depicted as occurring in a
n u m b e r of stages, each of which is illustrated
from Johnson's studies of early organisations
and accounting systems.
The initial proletarianisation o f the labour
force
The first stage o f management accounting
d e v e l o p m e n t described by Johnson and Kaplan,
came with the end of putting out and other
forms o f subcontracting in single-product firms.
In their account, the driving force behind this
d e v e l o p m e n t was a belief on the part of
entrepreneurs that gains in profitability could
be obtained by increasing the efficiency of the
conversion process and from improvements in
labour productivity. In pursuit of these aims,
systems o f accounting for prime costs w e r e
developed. These enabled owners and entre-
preneurs to monitor and compare the perfor-
mance of workers and their supervisors, to
encourage workers to achieve "company goals"
and to root out "slack behaviour". In these
single activity organisations there was no
d e v e l o p m e n t o f measures of efficiency with
which capital was employed, since there w e r e
no decisions to be made on alternative uses of
capital. In any case, the rapid expansion of
American markets from 1820 to 1870 ensured
that a control o f operating costs was sufficmnt
to achieve satisfactory long-run returns on
capttal.
The key case-study used by Johnson and
Kaplan to substantiate this part o f their thesis is
that o f the accounting system of Lyman Mills
(Johnson & Kaplan, 1987, p. 24 ft.). This was
one of a n u m b e r of textile factories sited in the
N e w England towns o f Waltham, Lowell and
Holyoak, which w e r e o w n e d by a close-knit
group o f financiers called the "Boston
Associates". These employers shared technolo-
gical information, used c o m m o n selling agents
and managed their factories along very similar
lines. Wage rates and working rules, for ex-
ample, w e r e identical throughout the group
(Dublin, 1979). As will shortly appear, a
n u m b e r o f the Boston Associates' factories have
413
been studied by labour historians, and these
studies provide an illuminating commentary on
Johnson and Kaplan's analysis.
Essentially, the Lyman Mills accounting
records consisted of records of operatives'
wages and other prime costs of production
which w e r e inspected weekly by the treasurer
at company headquarters in Boston. Johnson
and Kaplan's interpretation is that this informa-
tion was used by the management to monitor
and compare the performance o f individuals
and of groups of workers with the object of
increasing efficiency
In contrast to Johnson and Kaplan's
approach, writings in the labour process tradi-
tion emphasise that much of the gain in
profitabfltty from the early factory organisation
of production came, not from increases in the
technical efficiency of the conversion process,
but from the ability of owners/entrepreneurs to
mtensify labour through close disciplinary
control and to extend the working day
(Clawson, 1980) Operatives in the Boston
Associates' factories, for example, worked 12
hours per day, six days per week (Dublin, 1979,
p 59), throughout the labour intensification
process to be described presently. Similarly,
Marglin (1974), has noted that many early
English factories employed precisely the same
production technology as the handicraft system
which they displaced, indicating that their
initial competitive advantage stemmed not
from economies of scale, technological innova-
tion or some conjectural reduction o f transac-
tion costs, but from an increased enhanced
ability of owner-managers to discipline and
drive labour in the factory setting (see also
Gordon et aL 1982, p. 58).
In this phase of capitalist development,
which Gordon et aL ( 1 9 8 2 ) call initial
proletariamsation, labour processes remained
for the most part untransformed. In the Marxist
terminology of labour process writers, labour
had b e c o m e formally subordinated to capital
in the sense that workers w e r e n o w employees,
but there was, as yet, little real subordlination in
the sense that production processes w e r e
designed and controlled by employers and their
414 TREVOR HOPPER and PETER ARMSTRONG
agents. The major exception, in the American
context, was the New England textile industry
( o f which Lyman Mills was, of course, a part).
From the outset, this employed the mechanised
p r o d u c t i o n methods pioneered in Great Britain
(Lazonick, 1981; G o r d o n et aL, 1982, p. 69;
Burawoy, 1985).
Since the workforces of the day w e r e accus-
t o m e d to the rhythms of agricultural produc-
tion, the ability of early factory regtmes to
increase labour productivity d e p e n d e d on a
harsh discipline of time and task (Thompson,
1967). Partly for this reason, factory work was
unpopular and the supply of labour frequently
d e p e n d e d upon a lack of alternative sources of
livelihood. Some early American textile mills,
for example, recruited whole famdies from the
depressed agriculture o f New England on the
so-called "Rhode Island system" (Ware, 1931;
p. 199). The Boston Associates, on the other
hand, o w e d much of their success to the
provision of company dormitories for single
'`yankee farm girls" willing to w o r k for a short
period in order to supplement the family
income before returning to marriage and the
land (Ware, 1931; Dublin, 1979, p. 16, Gordon
et aL, 1982, pp. 6 8 - 6 9 ) . Besides serving to
attract labour, this system also exhibited
some of the features of "total institutions"
(Goffman, 1968), creating the conditions for a
disciplinary regime which extended deep into
what w o u l d nowadays be considered to be the
workers' private lives (Gersuny, 1976).
Whilst Johnson and Kaplan are too
c o m p e t e n t as historians to be unaware of these
features of the organisation of Lyman Mills, or
to ignore the potential of the accounting
records for increasing effort levels, their inter-
pretation is distorted by their commttment to
transaction cost theory. They write: "The early
cost accounts of Lyman Mills also offered
incentives and controls to mitigate slack be-
haviour that might otherwise disstpate the
productivity gains inherent in mechanised,
multiprocess systems" (Johnson & Kaplan,
1987, p. 31) Thus an intensification of labour is
represented as an implicitly costless reduction
of "slack behaviour" and the productivity gains
therefrom are credited to mechamsation and
integration.
The facts certainly bear a different interpre-
tation. The accounts in question date from the
mid-19th century, a period w h e n the Boston
Associates w e r e faced with failing prices and
rising inventories of unsold cloth as a result of
intensified c o m p e t i u o n from England. In 1834,
acting in concert, they imposed a wage cut of
about 1896 in all their factories, so precipitating
an abortive strike. In 1836, there was a similarly
unsuccessful strike against an increase tn the
price of board and lodgings. By the time further
wage cuts w e r e imposed m 1837 and 1840, the
"Yankee farm gtrls", having alternatave means of
survival, were beginning to leave the mills and,
from 1840 onwards, their place was increas-
mgly taken by Irish tmmigrants w h o had little
choice but to accept the worsening conditions.
The factories themselves w e r e managed by
on-site agents w h o reported weekly to a chief
executive and treasurer based in Boston. Whilst
the pressure to increase production or reduce
costs came initially from the treasurer, agents
had substantial autonomy as to h o w this was
done, Though there w e r e some technical
process improvements, their main responses
w e r e the stretch-out (an increase in the
number of machines supervised by each oper-
ative), the speed-up (an increase in the oper-
ating speed of the machines) and a premium
bonus system w h e r e b y the overseer whose
workers p r o d u c e d at least unit cost received a
cash payment which could amount to as much
as $100, compared to an annual salary of $600.
Indeed this latter incentive was blamed for a
p r o n o u n c e d deterioratton in the relationships
b e t w e e n overseers and the "girls".
As a result of these measures, the workload of
the spinners and weavers more than doubled
between 1840 and 1854 whilst wages remained
substantially the same. Indeed it was the
exphcit policy of the Boston Manufacturing
Company in Waltham (and probably of other
factories in the group) to adjust piece-rates so
that earmngs remained steady whilst speed-up
and stretch-outs w e r e imposed - - quite apart
from actual reductions in real wages. The
 COST ACCOUNTING, LABOUR AND CONGLOMERATES
records used to achieve these results w e r e
those o f the paymaster, to w h o m w e r e reported
monthly figures for output, days w o r k e d and
earnings o f each operative (Ware, 1931, pp
230-272; Dublin, 1979, pp. 100-109).
It is not clear from Johnson and Kaplan's
account w h e t h e r their interpretation of the
uses made o f accounting information in Lyman
Mills is based o n records similar to these, or on
others. W h a t / s clear, however, is that s o m e of
the accounting information in the Boston
Associates' factories o f the mid-19th century
was clearly implicated in the intensified exploi-
ration of labour with which the employers
responded to increased competition.
O n c e it is established that accounting inform-
ation is used to redistribute the rewards from
p r o d u c t i v e labour, rather than to increase the
efficiency with which it is employed, it needs to
be seen in the c o n t e x t o f other labour process
controls, since such a redistribution may well
be resisted. For example, records which indi-
cate w h e r e piece-rates "should" be cut are of
little use unless the possibility o f acting on the
information has already b e e n established.
As has already b e e n pointed out, the Boston
Associates' factories w e r e run as a unit, with
identical wage structures, conditions and lists
of disciplinary rules. In order to solve the
p r o b l e m of labour stability, the "girls" w e r e
required to sign yearly contracts, with defaul-
ters blacklisted throughout the group. Depart-
ments within the factories w e r e controlled by
( m a l e ) overseers w h o had absolute p o w e r to
hire, fire and discipline the workers. Gersuny's
( 1 9 7 6 ) study o f the records of dismissals from
one factory in the group shows a pattern of
individual victimisation, sometimes for "combi-
nation" (trade union activity), coupled with a
managerial c o n c e r n to establish their own
dominance and what they considered to be
p r o p e r standards of deference in the workforce,
in the light o f the prevailing gender stereotypes
o f the time. In the c o m p a n y dormitories "moral
police" controlled out-of-work behaviour,
which, again, included a prohibition on "combi-
nation". By these means, the Boston Associates
and their agents maintained the control o f the
415
labour force upon which depended their ability
to act on the labour cost information generated
by their accounting records.
Internal contract a n d the role o f a c c o u n t i n g
in its d e m i s e
The recruitment and control of sldlled labour
posed special problems for the early industria-
fists, especially in America w h e r e it was scarce
(Habakkuk, 1967) To some extent, the supply,
as with semi-skilled labour, depended on a lack
o f alternatives. Some industries w e r e able to
depend on a supply of ex-handicraft workers
driven out of business by the emergent
capitalist enterprises ( G o r d o n et aL, 1982, p.
57). In the particular case of the New England
textile industry, w h e r e the production process
was an import or reinvention of English tech-
nology (Lazonick, 1981 ), low wages in England
created a supply of skilled immigrant workers,
despite laws forbidding their exodus (Ware,
1931, p 203). For the employers, external
recruitment from these sources had the impor-
tant consequence that craft knowledge was
initially possessed by the workers rather than
themselves, with skills passed on by senior
workers to their junior counterparts through
systems of apprenticeship.
With this situation, the problems of delegated
control began. Whilst salaried managers and
foremen existed, they w e r e not the norm. With
Adam Smith (and like contemporary agency
theorists), most 19th century owner--managers
believed that the security of fixed salaries could
only lead to "idleness, negligence and pro-
fusion" (Smith, 1970; see also Clawson, 1980, p.
68). Instead, they preferred to rely on the profit
motive, in a variety of forms of internal
subcontracting, some of which cast skilled
craftsmen or heads of households in the role of
mternal contractors (Littler, 1982). Besides
providing a clear motivation for contractors to
extract the most out o f the labour they
employed, the subcontracting relationship had
several other advantages for employers: it
largely eliminated the need for them to be
conversant with the production process
(important so long as craft workers still
416 TREVORHOPPER and PETERARMbiKOt~
possessed the "secret knowledge of produc-
tion"), it spread risk, and it avoided large
administrative overheads, partly by acting "as a
substitute for accounting" (Littler, 1982, p. 6 7 )
T h o u g h internal contract began to disappear
in the latter half of the 19th century, tt cannot
b e assumed that thts was a c o n s e q u e n c e of the
e c o n o m i c inefficiencies of an archaic system or
a technological conservatism rooted in a mono-
polisation of p r o d u c t i o n knowledge by the
workforce. Clawson ( 1 9 8 0 ) points out that
m a n y of the 19th century factories run on the
internal contract system (such as the
Winchester Repeating Arms C o m p a n y ) w e r e
large, c o m p l e x and technologically progressive,
with m a n y examples of technologtcal inno-
vation instigated b y the subcontractors. In fact
the eventual displacement of internal contrac-
tors from Winchester Arms resulted in in-
creased costs for a n u m b e r o f years, probably
because the college-trained executives w h o
replaced t h e m lacked their practical produc-
tion know-how.
Clawson suggests that the real reason for the
displacement of the internal contractors lay in
their ostentatious displays of wealth m times of
prosperity. Their tendency to turn up for w o r k
in horse-drawn carriages, for example, was
greatly resented b y e m p l o y e r s b o t h as visible
h a e m o r r h a g e of profit and as contrary to their
ideas on social rank. Thus the employers' gut
response to e c o n o m m d o w n t u r n was a system-
atic a t t e m p t to squeeze their contractors'
profits Clawson's account of events in a
n u m b e r of American companies in the last
quarter of the 19th century indicates that the
d e v e l o p m e n t of labour cost records was inte-
gral to this process.
Until the 1870s, contractors in the metal-
w o r k i n g industries w e r e paid according to the
contract price and the n u m b e r of units
dehvered. Compantes kept no record of the
hours w o r k e d b y the contractors' employees,
or of h o w m u c h and on what basis they w e r e
pard There was therefore no c h e c k on con-
tractors' profits, either overall or on particular
tasks. Amongst others, the Singer c o m p a n y
decided to change all this b y paying employees
directly. According to a c o n t e m p o r a r y source,
what "looked like a very innocent and un-
important c h a n g e . . , was really the thin edge of
the w e d g e which was ultimately to deprive the
contractor of his profits" (Clawson, 1980, p.
117). Of necessity, the direct p a y m e n t of wages
called for the creation of records, and these also
enabled the c o m p a n y to obtain information on
the wage cost of each item of p r o d u c t i o n and so
discover which contract prices w e r e high in
relation to the contractors' costs. This informa-
tion was subsequently used to renegotiate
contract prices and so reduce the contractors'
income. Eventually, contractors b e c a m e reluc-
tant to bid on certam jobs wtth the result that,
over time, fewer and fewer of the c o m p a n y ' s
workers w e r e e m p l o y e d through them.
Johnson and Kaplan have comparatively httle
to say on internal contract. However, they do
locate "the scientific quest for knowledge about
efficiency" ( p 4 8 ) in the c o n t e x t of metal-
working firms w h i c h w e r e originally run on this
system. Whilst noting that internal contracting
meant that the beneficiaries of effictency
i m p r o v e m e n t s tended to be contractors and
their workers rather than ownership, Johnson
and Kaplan nevertheless see the motive for
improved record-keeping as a "desire for closer
control o v e r increasingly c o m p l e x and special-
tsed manufacturing tasks" rather than a redis-
trtbution of the benefits from innovation.
According to J o h n s o n and Kaplan, moreover,
the t m p r o v e m e n t in record-keeping was
accomplished by encouraging workers to re-
cord their o w n acttvities in return for a share in
the gains from t m p r o v e d efficiency. By contrast,
Litterer's study ( 1 9 6 3 ) indicates that workers
w e r e not trusted in this respect and that
specialist time-keepers w e r e e m p l o y e d for the
purpose.
The discrepancy in these accounts is marked.
For Johnson and Kaplan, accounting develop-
ments appear as part of a drive for efficiency. To
Clawson, the immediate stimulus was a desire
to approprtate the profits of internal contrac-
tors, at the expense, initially at least, of
increased costs. To Johnson and Kaplan, the
d e v e l o p m e n t of w o r k records had relatively
 LObVl ACCOUNTING,LABOURAND CONGLOMERATES
benign c o n s e q u e n c e s for the Workforce. To
Litterer, o n the o t h e r hand, the result was the
imposition of an additional system of activity
surveillance, in w h i c h it is not too fanciful to
see the origin o f the future expansion of
supervision. The suggestion is that the creation
of internal cost records marks the beginning of
a transfer of financial knowledge from the
w o r k e r to the factory owner, which not only
p e r m i t t e d rewards from innovation to flow in
the same direction, but also provided the
potential for making visible w h e r e returns
might best b e c r e a m e d off and labour b e
intensified and disciplined
The question of the reasons for the decline of
internal contract is important for Johnson and
Kaplan's history. As they point out, it was the
establishment of costing systems specifically in
the metal-working industries, w h e r e internal
c o n t r a c t had previously b e e n dominant, which
laid the foundation for the later d e v e l o p m e n t of
standard costing systems b y the American
industrial engineers. If, as is suggested by
Clawson's work, the establishment of these
early costing systems had nothing to do with
the efficiency of the conversion process (and, in
the event, actually reduced it), but was a means
of redtstributing profits, the general applica-
bility of J o h n s o n and Kaplan's historical model
is t h r o w n into question. If relatively p e r m a n e n t
changes in systems of organisation and account-
ing can b e s h o w n to o c c u r which have nothing
to d o with gains in efficiency ( o r reductions in
transaction costs), it follows that the latter
cannot b e a sufficient explanation of the former.
Scientific Management and the
homogenisation of labour
The s e c o n d major phase of m a n a g e m e n t
accounting d e v e l o p m e n t o c c u r r e d roughly be-
t w e e n 1870 and 1920, as firms sought to
maintain profitability through a sertes of eco-
n o m i c recessions. The period was also charac-
terised b y intensified c o m p e t i t i o n m conse-
q u e n c e of the geographical expansion of mar-
kets, following the creation of a national rail
n e t w o r k offering c h e a p freight rates
Ftrms r e s p o n d e d in t w o basic ways. Attempts
417
tO intensify the labour process took the form of
further assaults u p o n internal subcontracting
and craft labour controls. At the same time,
companies sought to p r o t e c t themselves from
competition and the p r o s p e c t of bankruptcy
through a sertes of mergers, culminating in the
great m e r g e r m o v e m e n t of 1898-1902. In the
space of twenty years, the structure of
American industry was dramatically
transformed. The small, owner-managed and
essentially self-financing firms of the late 19th
century w e r e swept u p into giant conglomer-
ates, controlled by external financiers through
pyramid holding companies and the concen-
tration of voting rights into small proportions of
the total e q m t y (Berle & Means, 1933).
In a c o m m a n d i n g synthesis of labour histor-
ies of the period, M o n t g o m e r y ( 1987, pp. 4 5 -
4 6 ) describes b o t h of the above developments
in the American iron, steel and metal-working
industries b e t w e e n 1870 and 1930:
By the turn of the century, the steelmasters' quest for
greater and more secure profits had led them not only to
integrate 'q~ackward"for every operation from the non
or coal mine to the rolling mill but also to attack the
menace of workers' control in any part of those
operattons and ulttmately to search for ways in whtch to
cut the taproot of nineteenth century workers' power
by dmpossessmg the craftsmen of thetr accumulated
skdl and knowledge.
W h e r e Johnson and Kaplan follow the transac-
tion costs o r t h o d o x y in arguing that the
appearance of vertically integrated companies
resulted from entrepreneurial perceptions of
possible efficiency gains, M o n t g o m e r y ( 1987, p.
179) points out that it is difficult to point to
cost savings for the large metal.fabricating
firms, since these enjoyed few e c o n o m i e s of
scale, if any. Similarly, whilst Wells ( 1 9 7 8 )
concurs with Johnson and Kaplan that develop-
ments in cost accounting w e r e closely associ-
ated with the efficiency m o v e m e n t centred on
the American Society of Mechanical Engineers,
he explicitly denies their p r e s u m e d imperative
of effictency as a cause, noting that, "Contrary
to the c o m m o n view that competition provided
the stimulus to the introduction of costing
418 TREVOR HOPPER and PETER ARMSTRONG
systems, a notable feature of the American
mechanical engineers was a lack of
competition" (Wells, 1978, p 51). In parallel
with the theme of this paper Wells goes on to
note that by the 1920s "With the advent of
efficiency experts, the emphasis [of costing
systems] shifted to control" (Wells, 1978, p.
53)
The increases in the size and complexity of
industrial organisations following the merger
movement, and employers' efforts to develop
systematic means of labour control, created a
need for complex managerial hierarchies to
administer the paper bureaucracy which in-
creasingly replicated and controlled the
productive processes (Braverman, 1974). How-
ever, these systems did not appear overnight.
Initially the labour process was managed
through the agency of foremen, and efforts at
intensification were relatively unsystematic.
Later, however, this aspect of the foreman's role
was increasingly taken over by the industrial
engineers, who began to undermine craft
controls through process redesign and the
creation of effort standards under the slogan of
"Scientific Management" These formalised
production methods and effort (cost) standards
were to play a crucial role in the developing
bureaucratisation of industrial organisation
(Littler, 1982).
The role o f accounting information in
supplementing the control o f the labour
process by foremen
The destruction of internal contract left "the
employer facing the solidity of his own
Ignorance about shot>floor performance" (Littler,
1982, p. 84). This vacuum of managerial
knowledge was initially filled by salaried fore-
men, employed at a fraction of the costs of the
former subcontractors, though initially wield-
ing much the same powers (Clawson, 1980, p
127). Fundamental to the labour process
approach to organisational history, however,
is the notion that "solutions" to the organ-
isational problems of capital accumulation
inevitably generate further problems which
derive ultimately from contradictions in the
social relations of production. The expansion of
the "foreman's empire" (Gordon et aL, 1982, p.
135) created two such problems: that of how
the foremen were to control the work of skilled
craftsmen, and that of how employers and their
senior managers were to monitor and control
the activities of the foremen themselves. In
both cases, the "solution" involved develop-
ments in cost and management accounting.
The problem of controlling the "foreman's
empire" grew quickly Partly because of the
detailed controls of the labour process de-
manded by the new methods of management
(to be discussed presently), the number of
foremen in manufacturing industry increased
by more than 300% between 1900 and 1920,
whilst total employment increased by only
96%. At the beginning of the period, moreover,
foremen exercised virtually unlimited authority
within the shop, controlling the administration
of payment systems as well as possessing the
unfettered right to hire, fire and promote
workers (Gordon et aL, 1982, pp. 135-137).
These wide and arbitrary powers were resented
by workers and were a significant source of
disputes.
Part of the employers' response was a gradual
transfer of many of the foreman's functions to
centralised staff departments as the continued
increase in the size of companies made these
economically feasible. Personnel offices took
over payment systems and the hiring and firing
of labour, whilst rate-fixers and quality control
inspectors appeared on the shop floor (Jacoby,
1985) The other aspect of the response
depended upon accounting records. As has
already been pointed out, earnings and produc-
tion records at Lyman Mills were already being
used by the 1850s to allocate bonus payments
to those supervisors whose workers produced
at the lowest unit costs. The 1915 prime cost
reporting system a t the E.I. DuPont de Nemours
Powder Company was similarly used to stimu-
late competition between mill superintendants
to produce a t the lowest direct cost (Johnson,
1975, Johnson & Kaplan, 1987, p. 72). These
instances indicate that the current concerns of
agency theory are very venerable indeed: cost
 COSTACCOUNTING,LABOURAND CONGLOMERATES
data seem to have been used from the outset to
create a framework of monitoring informatton
with the object o f containing the wide powers
then delegated to foremen and superintendents
by aligning their interests with those o f their
employers.
Standard cost systons and the control o f craft
labour
Whilst historical costing systems, backed up
by the disciplinary powers o f foremen, might
suffice to speed up semi-skilled labour pro-
cesses, the obstacles to the intensification of
labour posed by the craft control of skilled
work w e r e of a different order. Ultimately, of
course, they acted as the catalyst for funda-
mental changes in the nature o f capitahst
control o f the labour process.
In the first experiments, from the 1880s
onwards, p i e c e w o r k began to supplant the time
rates previously Favoured by internal contrac-
tors (Clawson, 1980, p. 168; Littler, 1982, p.
82), o n the supposition that a general economic
incentive to increase output could bypass the
p r o b l e m o f detailed labour process controls.
In practice, however, managements invariably
u n d e r m i n e d their o w n logic of incentives by
cutting rates w h e n e v e r workers' earnings rose
to a level which they considered unacceptable
This tactic caused many industrial disputes
until workers learnt to defend themselves
against rate cutting by restricting output (a
practice recognised as "systematic soldiering"
by Taylor, but attributed to a "logic of senti-
ments" r o o t e d in anthropological mysteries m
the supposedly m o r e sophisticated Hawthorne
studies o f the 1920s (Rose, 1979)). For these
reasons, the simple replacement of time-rates
by piece-rates p r o v e d self-defeating.
From the 1890s until the First World War,
time-saved bonus systems enjoyed a vogue with
employers in the British engineering industry,
since these systems incorporated a kind of
automatic and concealed rate-cutting. A bastc
wage was guaranteed for a level o f productton
corresponding to pre-set time allowances, be-
y o n d which bonuses w e r e payable in propor-
tion to the "time saved" over these allowances
419
The element of rate-cutting stemmed from the
Fact that production over a basic level was paid
at a progressively lower rate. Eventually this
system also stimulated opposition and output
restriction on the part of the workforce (Littler,
1982, p 84)
All of these systems failed as means of
combatting output restriction for one simple
reason: that the piece-rates and time allowances
themselves already contained an element of
output restriction because they could only be
set on the basis of observation, judgement or
past experience. In two respects, however, the
experiments with piece-rates laid the founda-
tions for the future development o f Scmntific
Management: they clarified the need for
management to understand and take control of
the labour process in order to speed it up,
rather than relying on generalised economic
pressure, and they stimulated the creation of an
infrastructure of systematic record-keeping on
the activities o f the workforce (Clawson, 1980,
p. 187).
The outlines of the "revolution in manage-
ment" built on these foundations by F. W.
Taylor and other American industrial engineers
are too familiar to need detailed rehearsal here.
Because "Both the cost and intractability of
skilled labor posed special challenges to the
owners of metal working firms", it was these
which provided the crucial "laboratory" for the
original development o f Scientific Management
by the American Society of Mechanical Engi-
neers (Montgomery, 1987, p. 179), which both
Johnson & Kaplan ( 1 9 8 7 ) and Wells ( 1 9 7 8 )
recognise as central to cost accounting
developments.
The means of removing the obstacle to
control presented by craft skills d e p e n d e d upon
a "homogenlsation o f labour" ( G o r d o n et aL,
1982) in which craft labour processes w e r e
redesigned, fragmented and simplified so that
skill levels w e r e reduced and the mental
aspects of production incorporated mto
management (Braverman, 1974). Technological
developments w e r e involved in this process as
well as the mere redesign of labour processes.
G o r d o n et aL (1982, p. 115) give examples of
420 TREVOR HOPPER and PETER ARMS'FRONG
technological changes in the metal-working
industries which w e r e aimed at breaking the
p o w e r of highly-paid and troublesome craft
workers rather than "quantitative reductions m
unit factor costs in the short run" (see also
Bruland, 1982, for British examples)
Like Taylor himself, Johnson and Kaplan
represent Scientific Management as a search for
efficiencies. Whilst labour process writers are
willing to c o n c e d e the positive contribution of
trained mechantcal engineers in this respect
(e.g Clawson, 1980, p. 237), it is important to
recall that Taylor also saw his system as an
assault upon "systematic soldiering", that is, the
restriction of o u t p u t by skilled craftsmen based
on the m o n o p o l y of production know-how
which they had hitherto possessed. Once "All
possible brain w o r k [was] removed from the
shop and centred in the planning or laying-out
department" (Taylor, 1903), it became possible
to take control of the pace of work m a manner
which had b e e n inconceivable under the
reg~ne of craft control. Moreover, the clatm
that effort standards could be "scientifically"
determined, h o w e v e r nonsensical to the philo-
sophically inclined, provided a potent ideologi-
cal warrant for the speed-up (Clawson, 1980, p
236). From the perspecttve of labour process
theory, the key feature of Scientific Manage-
ment was not the increases in technical effic-
iency, but the creation of deskiUed and
fragmented labour dependent upon the pro-
duction engineering and control n o w in-
c o r p o r a t e d into management. Both to Marx and
to Braverman (1974), thts real subordmation of
labour to capital was one of the defining
features of the fully developed capitalist mode
of p r o d u c t i o n
As is by n o w well known, the first standard
cost systems w e r e closely associated with the
scientific Management m o v e m e n t (Wells, 1977,
1978; Epstein, 1978). However, the labour
process control and intensification aspects of
Scientific Management are not squarely recog-
nised in most accounting histories and, in
consequence, these are not always clear on the
respects in which standard cost systems rep-
resented an "advance" on detailed historical
costing systems of the Lyman Mill type (e.g.
Garner, 1976). The labour process perspective
considerably illuminates such questions: whilst
historical cost systems permitted detailed and,
in prmciple, timely monitoring of performance,
and could well have been developed into full-
blown systems of variance reportmg on the
basis of standards derived from experience, true
standard costs are based on the engineering
redesign and analysis of the labour process, and
so are invulnerable to the influence o f the
workforce. It is this critical difference, a
difference in the source of standards rather than
m accounting procedures, which has made
them such an effective instrument of manage-
ment control and the intensification of labour
Management accounting homogenised
labour a n d a n t i - u n i o n i s m in the 1920s
During the merger wave at the end of the
19th century, vertically integrated organ-
isations began to appear, which incorpor-
ated purchasing, transport and distribution
within the same organisation as manufacturing.
This development was driven by the realisation
of entrepreneurs that profits could be increased
by securing reliable supplies of raw materials
and stable markets for mass production pro-
cesses, by economies of scale, and by acqui-
sition of the profits of formerly independent
suppliers of materials and the commissions of
former selling agents. In their early form, these
organisations developed functional structures
which enabled the experttse of specialist mana-
gers to be brought to bear on each aspect of
company operations. At this stage the account-
ing measures of operational efficiency first
developed in single activity organisations
sufficed Top management, meanwhile, w e r e
faced with two new tasks which had not existed
in single-activity organisations: that of ensuring
that the activities of specialist managers w e r e
aligned with the objective of company profit-
abihty and that of devising the optimum pattern
of investment of company resources These
problems ~ notably as encountered in the
General Motors inventory crisis of 1920
stimulated new developments in organisational
 COST ACCOUNTING, LABOUR AND CONGLOMERATES
forms and management accounting technique.
In the pioneering multidtvisional organisations,
the problems of performance monitoring and
investment allocation w e r e tackled by the use
o f budgets to control and balance the internal
flow o f resources and by use of such measures
as return-on-investment (ILO.I.) and stock
turnover ratio to compare the productivity of
capital invested in different activities, as well as
to measure the performance of their managers
(Chandler & Daems, 1979). In a kind of
bureaucratised revival of internal contract,
these forms o f organisation linked managers'
career interests to accounting measures of
performance, so permitting a "decentralised
centralisation" (Pfeffer, 1978), in which
managerial initiative could be contained within
the imperative o f capital accumulatton. At the
same time, the proliferating flows of financial
information, along with the managerial records
o f performance and standards already gener-
ated by industrial engineering, resulted in vast
shadow paper organisations which mirrored
the productive process, thus rendering it visible
and accessible to managerial intervention, but
which, at the same time, called for expanded
cadres of managerial, technical and clertcal
labour which created control problems of their
OWn.
Johnson and Kaplan describe these processes
through a discussion of the accounting inno-
vations o f Dupont and General Motors from
about 1900 to 1925. The nature of these
accounting innovations is n o w widely known
through the researches of business historians
such as Chandler (1966, 1977), Dale ( 1 9 6 0 )
and Johnson himself (1975), and there can be
no serious doubt that they w e r e crucial to the
success o f the giant, and otherwise unwieldly,
conglomerates o f m o n o p o l y capitalism. What is
o p e n to dispute is the precise nature of their
contribution. Johnson and Kaplan take the
conventional line that accounting measures of
the performance o f operating units provided a
rational basis for the allocation of corporate
investment resources, and also served to align
the interests o f middle management to those of
corporate management and capital ownership
421
(cf. Chandler & Daems, 1979). The emphasis in
thLs account is on the control of operational
management, firstly by the subjection of their
claims on corporate investment resources to an
apparently rational comparative appraisal, and
secondly by the creation of measures of their
performance. Leaving to one side the consider-
able literature on the consequences of d~vi-
sional performance measures for intermanagerial
conflict and other org~dsational "dysfunctions",
it is noticeable that the workforce simply does
not enter into Johnson and Kaplan's conception
of the role of the new management accounting
techmques. The result is that they are insensi-
tive to the historical specificity of the condv
tions under which the new techniques emerged,
and which may well have contributed to their
success.
According to Gordon e t al. (1982), the years
1890 to 1920, which roughly correspond to the
accounting innovations by Dupont and General
Motors, also saw the consolidation of a pattern
o f employment which contemporary observers
called the "drive system". This consisted of
three dimensions: the reorganisation of work,
facilitated by mechanisation and job restruc-
turing; increased plant size, which increased
the impersonality o f work; and the continuing
expansion of the foreman's role. The major
consequence for the workforce was the re-
placement of locally specialised skills and
experience by mass labour markets in which
the individual semi-skilled worker was highly
vulnerable to substitution. From the outset, the
consequent threat represented by the "reserve
army of labour" was reinforced by employer
campaigns to "extirpate unionism root and
branch from the United States" ( G o r d o n e t aL,
1982; see also Bendix, 1956, on the contem-
porary "ideology of the open shop"). Tactics
included the violent harassment and depor-
tation of trade union activists and the sponsor-
ship of company "unions".
The success of these campaigns varied with
economic conditions. During the labour short-
ages of the First World War, craft unions, in
particular, had achieved significant gains, partly
on the basis of the state's need to obtain the co-
422 TREVOR HOPPER and PETER ARMSTRONG
operation of organised labour. By the mid-
1920s, however, trade union strength, as
indexed b y strike activity and m e m b e r s h i p
statistics, was at a low ebb. Under these
conditions, there was little trade union resis-
tance to w h a t o n e c o n t e m p o r a r y c o m m e n t a t o r
called "fluctuating labour requirements", whilst
a n o t h e r o b s e r v e d that "physical output per
w o r k e r is e x t r e m e l y flexible and u n d e r favour-
able conditions can b e quickly and substantially
increased" ( G o r d o n et al., 1982, p. 163). This
was the general state of the balance of advan-
tage b e t w e e n labour and capital at the time of
the introduction of General Motors' pioneering
m a n a g e m e n t accounting system.
As outlined b y Johnson & Kaplan (1987, p.
102), this centred on the calculation of
"standard prices" w h i c h w o u l d ensure a 20%
return on capital for each p r o d u c t division at
80% capacity. Fixed capital investment for each
diviston was adjusted so that the yearly volume
planned o n the basis of sales forecasts could be
achieved at an average 80% capacity. Selling
prices in the industry w e r e traditionally fixed
for a year in advance and w e r e largely dictated
b y p r o d u c t markets. If the p r o p o s e d selling
prices fell b e l o w the standard prices needed to
maintain 20% IZO.I., divisional managers w e r e
e x p e c t e d to r e d u c e p r o j e c t e d operating costs.
Similarly, if sales forecasts ( b y corporate
m a n a g e m e n t rather than the divisional mana-
gers themselves in the mature system) mch-
cated that plant w o u l d run b e l o w 80% capacity,
operating costs w o u l d again need to be reduced
to compensate.
O n c e agreed, annual projections w e r e
b r o k e n d o w n into monthly forecasts according
to past e x p e r i e n c e of seasonal sales fluctuations
These forecasts specifically included budgets
for dtrect p r o d u c t i o n costs and earnings. Moni-
toring of p e r f o r m a n c e against targets was on a
m o n t h l y basis ( o r daily, in the case of s o m e
items), with an early form of flexible budgeting
used to isolate cost variations which w e r e due
solely to short-term output fluctuations from
"genuine" variations in p r o d u c t i o n costs. If,
during the planning year, there w e r e signs that
the target return-on-investment would not be
achieved, there was little s c o p e for corrective
action either by compensating cuts m fixed
capital investment, since this had already b e e n
determined, or through price increases, since
the industry tradition was to hold prices
throughout the model year. In any case, Sloan
believed that increasing prices at a time of
falling d e m a n d would have the effect of de-
creasing revenue (Sloan, 1986, p 147). Nor was
it possible to achieve targets by arbitrary
manipulations of overhead costs, a m o d e r n
practice m u c h excoriated by Johnson and
Kaplan, since factory overhead was applied at a
fixed rate to all units produced. The system
therefore encouraged divisional managers to
keep close control of inventories and to
respond quickly to adverse changes in the
competitive e n v i r o n m e n t or seasonal down-
turns in d e m a n d b y reducing direct costs.
Johnson and Kaplan make it clear that the
system was used to provide a very positive
motivation in this respect: "[the data] enabled
top m a n a g e m e n t to swiftly r e m o v e a divisional
manager w h o failed to perform as expected.
Obviously, such a reporting system put enor-
molls pressure on the division manager to
r e m o v e slack and inefficiency at all levels
within his division" (Johnson & Kaplan, 1987,
p. 116). Again, however, Johnson and Kaplan
see the situation through the distorting flame-
w o r k of transaction cost theory: the real-life
consequences for the workforce w e r e seasonal
lay-offs and speed-ups of the production lines,
b o t h of w h i c h practices w e r e notorious
throughout the American m o t o r industry of the
1920s
What Johnson and Kaplan d o not adequately
stress is that the American m o t o r industry of
the 1920s, besides being subject to the normal
instabilities of d e m a n d in a capitalist economy,
was highly seasonal, partly due to the employ-
ers' reliance on an annual spring model change
to stimulate sales. Douglas & Director (1931,
pp. 75, 7 7 ) give the following figures for the
seasonal variations in e m p l o y m e n t for the
industry as a whole:
1923 - - 50%
1924 - - 21%
 COST ACCOUNTING, LABOUR AND CONGLOMERATES
1925- 19%
1926- 11%
1927- 11%
1928- 10%
1930- 24%.
As for longer-term fluctuations in employ-
ment, McPherson ( 1 9 4 0 ) gives the following
figures for the peaks and troughs during the
193Os:
1929 -- 448,000
1932 ~ 244,OOO
1937 ~ 517,0OO
1938 ~ 306,000.
What distinguished General Motors from
other firms w h o s e e m p l o y m e n t practices are
aggregated within these figures, was that it
had an accounting system which enabled it
to b e m o r e responsive to market fluctuations
In o r d e r to obtain a rounded picture of
the operation o f this management accounting
system, therefore, it is important to appreciate
the costs which w e r e imposed upon the
workforce.
In the recession years o f 1 9 3 3 - 1 9 3 4 nearly
40% o f General Motors workers w o r k e d fewer
than 29 weeks. Even after switching to an
autumn model change in response to Govern-
m e n t pressure to stabilise employment, only
85% o f General Motors workers w o r k e d for a
full year (Fine, 1969, p. 60). With hindsight,
Alfred P. Sloan himself recognised "... the
hardships caused by o u r cyclical production"
(Sloan, 1986, p. 404).
Besides these aggregate effects, seasonal lay-
offs exposed workers to the arbitrary p o w e r of
foremen, since, throughout the 192Os and
193Os, it was largely they w h o decided w h o
would b e laid off and re-hired. This discretion-
ary p o w e r was routinely used to discriminate
against trade unionists (Fine, 1963, p. 151). For
workers o v e r 50, annual lay-offs also brought
the fear o f p e r m a n e n t unemployment since it
was widely believed by employers (with some
justification) that m e n of this age could not
keep up with the demands o f the line speeds
(Fine, 1969, pp. 56, 60; Jacoby, 1985, pp. 218,
235; Montgomery, 1979, p. 141).
423
Whilst the instability of 1920s' American
product markets certainly existed prior to
General Motors' accounting system, the latter
was clearly instrumental m throwing the costs
onto the workforce. Indeed, that was the logical
consequence o f a m e t h o d of accounting cal-
culation designed to p r o t e c t the shareholders'
20% return-on-investment in the face o f econ-
omic fluctuation. Providing headquarters man-
agement with d e a r and prompt signals whenever
falls in demand threatened divisional contribu-
tions to this target, the system, as Johnson and
Kaplan point out (1987, p. 116), was used to
put great pressure on divisional managers.
Whilst there may have been genuine long-run
gains in efficiency as a result, the extent and
timescale of the market fluctuations ensured
that the predominant managerial response
would take the form of lay-offs and the speed-
up It is arguable that the promptitude and
accuracy of these responses at General Motors
was the principle achievement of the system,
rather than the alchemy of efficiency claimed
by Johnson and Kaplan. In view o f this, it is not
surprising that there was widespread resent-
ment of budgeting during the 1920s and 1930s,
due to its association with the casualisation of
labour (Loncar, 1956).
The important implication is that the success-
ful operation of the 1920s' General Motors
accounting system d e p e n d e d on the inability of
organlsed labour to contest speed-ups and
seasonal lay-offs. Thus the anti-unionism of
General Motors during the 1920s was not a
quirk of labour relations policy incidental to the
serious business of corporate control: it was
integral to it. Only by neutralising union
demands for employment security and a voice
in the determination of workloads, could
General Motors top management secure the
freedom to act on the information provided
by their accounting system. For this reason,
the company fought tooth and nail against
the United Auto Workers' campaign for nego-
tiating rights, as this gathered m o m e n t u m
during the late 1920s and early 1930s (Bemstein,
1970, p. 515). More details will be given
presently.
424 TREVOR HOPPER and PETER ARMSTRONG
A n e w c o n t e x t f o r m a n a g e m e n t accounting:
the era o f s e g m e n t e d labour m a r k e t s
Like internal contract, the "drive system"
contained the germs of its o w n decay. Exhaust-
ing and stressful conditions of w o r k gave rise to
high labour turnover. Despite the general
success of the employers' anti-union drives and
the n e w transparency of the labour process,
there was still hidden resistance to the intensi-
fication of labour based on "informal" w o r k
groups. The c o n c e r n of employers o v e r this last
p h e n o m e n o n was evidenced by the e n o r m o u s
publicity attracted b y the Hawthorne experi-
m e n t s (Baritz, 1960). Moreover, the very
homogenisation of labour on winch the drive
system was based, created c o m m o n conditions
of w o r k amongst massive workforces, and thus
s o w e d the seeds of the 193Os' upsurge of
industrial unionism ( G o r d o n et a l , 1982). Most
fundamentally o f all, the growing gap b e t w e e n
wages and the productivity o f labour led to a
crisis, variously diagnosed as o n e of under-
c o n s u m p t i o n or over-production, which resul-
ted in the depression and mass u n e m p l o y m e n t
of the 1930s (Bernstein, 1970, p. 19).
O u t of this crisis there arose a n u m b e r of
mutually reinforcing developments which
changed the socio-political environment of
budgetary control in America's core corpora-
tions for several decades to c o m e Labour
unrest increased rapidly during the early 1930s,
with the issue of trade union bargaining rights
( r e c o g n i t i o n ) a t the head of the agenda, closely
followed b y insecurity of employment, wage
cuts and speed-ups (Bernstein, 1970, p. 172;
G o r d o n et aL, 1982). After b o t t o m i n g out at the
height of the slump, trade u m o n m e m b e r s h i p
m o r e than doubled b e t w e e n 1933 and 1941
(Fine, 1969; G o r d o n et al., 1982). These
d e v e l o p m e n t s w e r e linked with the pattern of
state intervention during the period, which
appears to have b e e n driven by a conviction
that the stability of the capitalist system ttself
was in question. W h e r e Roosevelt beheved that
recognition strikes w e r e endangering the pros-
p e c t of e c o n o m i c r e c o v e r y (Bernstein, 1970, p
172), Keyserling, a p r o m i n e n t atde of Senator
Robert F. Wagner, thought that only strong
trade unionism could raise purchasing p o w e r
and so set the economy in motion (Montgomery,
1979, p 164). Both views w e r e expressed in
the National Industrial Recovery Act of 1933
which contained provisions on collective bar-
gaining rights, to be adjudicated b y a National
Labor Board under Wagner's chatrmanship.
During an intervention in the automobile
industry dispute of 1934, this set up the
Automobile Labor Board, which imposed limited
seniority provisions for lay-offs on the industry
and was e m p o w e r e d to hear clatms of anti-
union practices The following year, u m o n
growth and campaigns for recognition w e r e
further stimulated b y the passage of the Wagner
Act which granted e m p l o y e r recognition of
single unions on a majority vote (Bernstein,
1970, p p 1 7 2 - 1 8 1 ; J a c o b y , 1985, p. 235; Fine,
1963, p. 251).
The initial response o f America's giant
corporations to this pressure for recognition
from the trade union m o v e m e n t and the state
varied in detail, but not in intent. W h e r e the
Ford Motor C o m p a n y relied upon the thugs of
Harry Bennet's "Service Department" to con-
duct a campaign of organised violence against
trade union activists, General Motors o p t e d to
spend just short of $1 million on espionage
o v e r the two-year period 1 9 3 4 - 1 9 3 6 m though
h o w this fitted into the corporate system of
budgetary control was not clear (Fine, 1963, p.
153; Fine 1969, p. 37; Bernstein, 1970, p. 739)
As has already b e e n indicated, there seems to
have b e e n a clear connection, in the mind of
General Motors' Alfred P. Sloan, b e t w e e n this
anti-union campaign and the maintenance of
the freedom of actton d e m a n d e d by the Slomn-
DuPont system of decentralised financial con-
trol (cf. Bernstein, 1970, p. 515):
We knew that some political ra(hcalsregarded unions as
instruments for the attainment of power But even
orthodox "business umomsm" seemed to us a potenttal
threat to the prerogattves of management What
made the prospect seem especially grtmm those early
years was the persistent umon attempt to invade basic
management prerogatives. Our rights to determine
productton schedules, to set work standards and to
chsctplme workers were all suddenly called mto
 COST ACCOUNTING,LABOURAND CONGLOMERATES
questton Add to tlus the recurrent tendency of the
umon to tnject ttself mto prmmg pohcy, and it ts easy to
understand why tt seemed to some corporate oflicmlsas
though the unton might one day be vtrtuaUym control
of our operattons (Sloan, 1986, pp 405--406)
Recall that General Motors' divisional budgets
w e r e issued in the f o r m o f " t a r g e t prices" and it
can b e s e e n that any trade union d e m a n d with a
non-zero cost w o u l d be likely to appear to
Sloan as an e n c r o a c h m e n t on "pricing policy".
State intervention to p r o m o t e union recogni-
tion was no m o r e w e l c o m e than the unions'
o w n efforts. Both DuPonts and General Motors
played a p r o m i n e n t part in the sponsorshtp of
the American Liberty League, which organised a
declaration b y a g r o u p o f p r o m i n e n t lawyers
that the Wagner Act was unconstituttonal, thus
furnishing their paymasters with a p r e t e x t for
ignoring it (Berustein, 1970, p. 515). On the
whole, h o w e v e r , these campaigns w e r e
unsuccessful: General Motors was forced to
recognise the United Auto Workers in 1937 and
Fords followed in 1941. Both companies accep-
ted seniority rights in lay-offs as part of the deal,
with the additional provision at Fords that
w e e k l y h o u r s w o u l d b e r e d u c e d to 32 before
any lay.offs t o o k place. In response to the
changed climate o f opinion, though not as a
result o f direct union or governmental
demands, General Motors, in 1939, introduced
a w a g e guarantee plan w h e r e b y workers with
five years' seniority w h o w e r e laid off or on
short.time could b o r r o w the difference be-
t w e e n their actual w e e k l y p a y and 24 hours'
worth, against their future earnings - - though
this s c h e m e was quietly d r o p p e d in 1942, w h e n
the industry was working at full capacity (Sloan,
1986, p. 404; Jacoby, 1985, p. 248).
As well as encouraging union recognition,
the Federal G o v e r n m e n t sought to p r o m o t e the
"stabilisation" o f e m p l o y m e n t by sponsoring
research o n the topic (e.g. Douglas & Director,
1931 ) and b y direct pressure on employers. In
an a t t e m p t to spread e m p l o y m e n t , the Natmnal
Industrial R e c o v e r y Act placed an u p p e r limit
o n the p e r m i t t e d hours of w o r k in each
industry (Fine, 1963, p. 35), whilst the Social
Security Act o f 1935 p r o v i d e d for employers
425
w h o guaranteed 1200 hours o f w o r k p e r year to
b e e x e m p t from a 3% payroll tax. This was
considered b y General Motors in 1938, but
rejected on the grounds that such a guarantee
could only b e e x t e n d e d to a minority of
employees, whereas there w o u l d be union
pressure to extend it to all (Sloan, 1986, p.
404). The Federal G o v e r n m e n t also persuaded
the automobile industry to s m o o t h d e m a n d by
introducing an autumn m o d e l change (Fine,
1969, p. 27, Jacoby, 1985, p. 236).
In summary, as the 1930s progressed,
Amertca's core corporations found themselves
u n d e r increasing pressure to a c c o m m o d a t e to
the demands of trade umonism and to provide
s o m e security of e m p l o y m e n t for at least a
section o f their workforces. To s o m e extent,
the e c o n o m i c basis for such an a c c o m m o d a t i o n
already existed. Anti-trust legislation notwith-
standing, a n u m b e r of large companies had
enjoyed dominant positions in their p r o d u c t
markets from as far back as the great m e r g e r
wave of 1895--1904. The second m e r g e r wave
o f 1 9 2 6 - 1 9 3 0 added m o r e (Nelson, 1959, p. 5).
During the early 1930s, indeed, a n u m b e r of
employers' organisations lobbied for a
relaxation of the anti-trust laws on the grounds
that reduced c o m p e t i t i o n w o u l d both end over-
p r o d u c t i o n and enable prices, and therefore
wages, to be ratsed, so stimulating demand
(Bernstein, 1970, p. 19). Douglas & Director
(1931, p. 109 ft.) saw additional connections
b e t w e e n m o n o p o l y and e m p l o y m e n t stabili-
sation, in the possibilities of production plan-
tung and the avoidance of "unnecessary" style
changes.
In response to demands for stabilisation, and
w h e r e there was a c o n t e x t o f limited p r o d u c t
market competition, corporate welfare
schemes k n o w n as the "American Plan" w e r e
introduced in p r o s p e r o u s and oligopolistic
mdustries such as autos, rubber, chemicals and
electrical machinery. For strongly u m o m s e d
workers, or those with s c a r c e skills, this
involved job security and o t h e r benefits deter-
mined by seniority. On the o t h e r s~de of the
coin, these privileges w e r e p r o t e c t e d from
e c o n o m i c fluctuations b y the e m p l o y m e n t of
426 TREVOR HOPPER and PETER ARMSTRONG
flexible reserves of black and Mexican labour at
the lowest w a g e grades (Montgomery, 1979, p.
160) Whatever the arguments for stabilisation
in c o r e areas of employment, there was little
e c o n o m i c logic in unnecessarily offering secur-
ity of e m p l o y m e n t or welfare benefits to
unskilled w o r k e r s w h o could readily be
replaced from the labour market and w h o
lacked the organisation to press their claims for
themselves. Moreover, the costs might be
prohibitive if the workers c o n c e r n e d w e r e
engaged o n labour intensive processes for
w h i c h there was a fluctuating demand.
Thus the n e w liberal approach to the control
o f labour was specific to core workers m core
corporations w h i c h possessed the market
p o w e r to stabilise d e m a n d for their products
Elsewhere, the earlier drive system persisted,
and this, in turn, b e c a m e specific to smaller
firms, unstable or competitive p r o d u c t markets,
and weakly organised labour forces. Labour
markets thus b e c a m e segmented into primary
and secondary sectors (Doeringer & Piore,
1971). E m p l o y m e n t in the primary sector was
characterised b y stability, relatively high wages,
career structures and relatively skilled w o r k
(for w h i c h training, often of a company-specific
nature, w o u l d b e provided), and b y compara-
tively strong trade unions ( w h e r e these exis-
ted). Within limits, labour in this sector was
treated as a valuable corporate resource, to b e
c o n s e r v e d in the face of (short-run) e c o n o m i c
fluctuations. In the secondary sector, w o r k was
unskilled ( o r treated as such), wages w e r e low,
trade unionism w e a k or non-existent and
e m p l o y m e n t was either unstable or explicitly
o n a casual basis. Besides this basra segmen-
tation, subsidiary patterns of differentiation
emerged. According to G o r d o n et aL (1982),
the p r i m a r y sector b e c a m e further segmented
into an " i n d e p e n d e n t primary" sector of pro-
fessionals and managers and a "subordtnate
primary" sector of skilled manual workers. As
has already b e e n hinted, the segmentation of
labour markets, from the beginning, tended to
coincide with g e n d e r and ethnic differences.
O v e r time, these patterns b e c a m e mstituttonal-
ised, w i t h the result that ethnic minoriues and
w o m e n w e r e assumed to possess characteris-
tics ( s u c h as unreliability and lack of ambition)
which peculiarly suited t h e m to secondary
sector e m p l o y m e n t (Barron & Norris, 1976).
For these, m a n a g e m e n t accounting systems
which pressured managers to adjust direct
costs in response to market fluctuations con-
tinued to b e relevant. For processes on w h i c h
primary sector w o r k e r s w e r e employed, this
particular relevance was lost, and there are
indications that the use m a d e of budgetary
controls changed. The precise nature of these
changes will be discussed after a brief con-
sideration o f Johnson and Kaplan's views on the
loss of relevance o f m a n a g e m e n t accounting
systems.
Relevance Lost. Johnson and Kaplan's analysis
In Johnson and Kaplan's view, the third and
latest period of m a n a g e m e n t accounting history
has b e e n o n e of stagnation and decadence
They deplore the retreat in m o d e r n manage-
ment accounting systems from the unambiguous
focus on p r i m e costs w h i c h characterised the
pioneering systems of DuPont and General
Motors. By the 1920s, the efforts of managers
and engineers to solve real-life p r o b l e m s had, in
their view, p i o n e e r e d m o s t of the current
techniques of m a n a g e m e n t accounting. Whilst
they acknowledge some later innovations, such
as discounted cash flow, residual income and
m o r e refined m a n a g e m e n t controls, they argue
that the teaching and practice of m a n a g e m e n t
accounting has generally stagnated or regressed
since the mid-1920s, with the result that these
are n o w out of t o u c h with the n e w competttive
and manufacturing environment.
This is attributed largely to the displacement
of engineers b y financial accountants as the
custodians of m a n a g e m e n t accounting exper-
tise. The c o n s e q u e n c e is that cost accounting
has b e c o m e less relevant to managerial
decision-making through its subservience to
external financial reporting. This is reflected in
the current emphasis u p o n inventory valuation
and integrated accounts and the widespread
adoption of arbitrary overhead allocations with-
m p r o d u c t costings. Academic accountants are
 COST ACCOUNTING, LABOUR AND CONGLOMERATES
implicated in this state of a~irs, notably through
their adherence to over-simplified normative
e c o n o m i c m o d e l s divorced from practice.
The emphasis o n these concerns in account-
ing education has, it is alleged, p r o d u c e d a
b r e e d of managers w h o "manage b y the
numbers", on the basis of obsolescent cost
systems w h i c h are at odds with the n e w
operations management, with its stress u p o n
quality, minimal set-up times and broader,
longer-run p e r f o r m a n c e criteria. Johnson and
Kaplan c o n c l u d e with a plea for the recon-
sideration o f detailed p r o d u c t costings through
tracer studies o f overheads as originally attemp-
ted b y engineers It is argued that information
t e c h n o l o g y can n o w o v e r c o m e the calculative
c o m p l e x i t y that defeated the early efforts o f
engineers to d o this.
As has b e e n indicated in the previous section,
this a r g u m e n t ignores the changed context of
m a n a g e m e n t accounting systems in American
corporations from the 1930s onwards. Because
J o h n s o n and Kaplan do not recognise that
systems o f the General Motors type were, in
part, administrative devices for matching cap-
acity to d e m a n d b y imposing speed-ups and lay-
offs o n the workforce, they are unable to
appreciate the significance of changes in the
balance o f advantage b e t w e e n labour and
m a n a g e m e n t w h i c h m a d e these courses of
action less possible. More, because they follow
the line of the transaction costs literature in
failing to acknowledge monopoly profits as a
drtving force behind acquisition and merger, they
rmss its significance in creating the economic
leeway which allowed the possibility of an
accommodation with primary sector workforces.
Rather than assuming that budgetary controls
w e r e driven off course by the requirements of
external financial reporting= post-1920s' develop-
ments need to be seen in the context of the
labour and capital accord in the primary sector
Budgetary controls in primary sector
employment., cost accounting f o r a labour-
capital accord
T h e r e w e r e p r e c e d e n t s for budgets to b e
used for planning rather than cost control. As
427
early as 1916, the Federal Trade Commission
had sponsored the d e v e l o p m e n t o f guides to
the i m p r o v e m e n t of cost accounting practice in
a n u m b e r of industries, in the belief that this
would both lessen the incidence of small
business failure and provide a means of con-
trolling price inflation (Miranti, 1986, pp. 451,
452). Some of the early literature on budgeting
reveals that the adoption o f budgeting in m a n y
American companies followed from their
involvement with g o v e r n m e n t in the two
World Wars, and from the debates o v e r Munici-
pal and Federal budgeting (Coonley, 1925;
Theiss, 1937; Fiske, 1947). For example, Rogers
( 1 9 3 2 ) notes h o w budgeting and costing w e r e
p r o m o t e d b y joint industry and g o v e r n m e n t
commissions on standardisation and the re-
quirement for i m p r o v e d record-keeping w h e n
contracts w e r e negotiated with state bodies.
The c o m m o n thread running through these
state-sponsored initiatives was the use of bud-
geting and cost accounting data to plan and
control the rate o f return on investment.
Having b e e n p u s h e d into budgeting b y the
requirements of state bureaucracy, business-
m e n soon recognised its potential for planning
o n their o w n account, as the c o m m e n t s of Vieh
(1925, p. 174) bear out:
Until we discover practical means of overcomm8 the
evils of booms and depre,sions which are inherent in
our present economic structure, years of poor business
and even unprofitable years are inevitable The
budget looks to the future with the hope of averting or,
at least, o f r e d u c m 8 t h e effects o f t h e storm w h e n it
breaks.
This use of budgetin 8 to anticipate and d a m p e n
the effects o f trade cycles on c o m p a n y profit-
ability is a recurring t h e m e o f its early advo-
cates. In contrast, the 1930s' advocates of
" e m p l o y m e n t stabtlisation" advocated the use
o f budgetary forecasts to plan a steady rate o f
pi'oduction which would build u p inventories
so as to a c c o m m o d a t e seasonal variations in
d e m a n d (Douglas & Director, 1931, p. 85), a
means of preserving the accord with primary
sector labour which b e c a m e widespread in the
years after the Second World War (Lewis et a t ,
428 TREVOR HOPPER and PETER ARMSTRONG
1984). Progress appears to have b e e n uneven,
however. According to Loncar (1956) the
potential of budgets for planning was not fully
appreciated b y m a n y firms until they encoun-
tered matertal shortages during the war.
The literature so far lacks a systematic
a c c o u n t of the use of accounting reformation in
formulating policies designed to preserve the
accord w i t h primary sector labour. Indeed,
there appears to b e a dearth of historical studies
of management accounting post-1930. 3
Clearly, however, a key policy decision in
m o n o p o l i s e d markets is that of price The case
of U.S. steel illustrates h o w cost accounting data
w e r e used to formulate placing policies with
the object of insulating profits from the con-
sequences o f the a c c o m m o d a t i o n with primary
sector labour, from the m o m e n t this b e c a m e
necessary. T h e c o m p a n y recognised the United
Steel Workers in 1937, conceding a wage
increase in the process. Immediately a policy of
building all future wage increases into the price
structure was instituted (Bernstem, 1970, p.
417; see also Baran & Sweezy, 1966, p. 77). The
aim was to maintain margins m the face of sales
fluctuations. Cross-plant average standard costs,
assuming p r o d u c t i o n at 80% capacity, w e r e
c o m p u t e d on the basts of the anticipated wage
settlement for the coming year. Overhead was
then assigned to every p r o d u c t on the
"traditional" assumption that each cent per
h o u r on direct w a g e costs w o u l d add one cent
p e r ton to non-wage cosTS. The result was that
the anticipated wage settlement was roughly
doubled, then multiplied by a "traditional" 20
man-hours to yield the n e w cost of a ton of steel
(Kaplan et aL, 1958, pp. 15, 1 6 ) . S i m i l a r
policies exist, or existed, in Alcoa and American
Can, the Oil Companies and DuPont (Kaplan et
aL, 1958, pp. 27, 150, 208, 256).
The case of the latter c o m p a n y also illustrates
the m a n n e r in which market domtnance en-
ables pricing policy to be used to t h r o w the
~he authors were led to speculate whether the "stagnatton" thesis of post-193Os' cost accounting owes more to the
stagnation of emptrtcal research relatmg to this pertod and to the questaons asked, rather than any real stagnation of
managerial practices assoctated wtth accounting.
COSTS of e c o n o m i c fluctuation onto smaller
competitors (Chandler & Salsbury, 1971, p.
155), which, in s o m e respects, might be viewed
as an alternative to "smoothing" p r o d u c t i o n b y
budgetary forecasTS. As will be s h o w n in m o r e
detail presendy, the DuPont strategy was to
monopolise only the stable base of a seasonal
market, rather than the w h o l e o f it, in accord-
ance with Pierre S. DuPont's 1903 dictum that
"the essence of manufacture is a full and steady
p r o d u c t " (Chandler & Salsbury, 1971, p 93).
This d e p e n d e d o n the c o m p a n y producing at a
cost lower than iTS smaller competitors.
DuPonts estimated their c o m p e t i t o r s ' costs (p.
157), using this information to set prices low
enough to discourage n e w competition and the
expansion o f existing competitors, but not low
enough to drive the m o r e efficient of these out
of business. These w e r e allowed to survive so
that they could absorb seasonal and other peaks
in d e m a n d (see also Johnson & Kaplan, 1987).
Clearly this business strategy creates the con-
ditions u n d e r which a large c o m p a n y might
offer a degree of e m p l o y m e n t security to a
primary sector workforce w at the expense of
insecurity in its secondary-sector competitors.
Unfortunately direct confirmation of the place
of labour relations in the DuPont strategy is
fragmentary, since the major historians of the
c o m p a n y (Chandler & Salsbury, 1971; Johnson
& Kaplan, 1987; Dutton, 1947) have paid little
attention to the workforce.
Budgeting is also involved in o t h e r elements
of planning w h i c h relate to the a c c o m m o d a t i o n
with primary sector labour. In expanding
markets, monopolistic firms which r e d u c e pro-
duction costs through process innovation may
use the p r o c e e d s to fund an increased sales
effort with the object of capturing the bulk of
the enlarged market and to c o m p e n s a t e the
workforce for their acceptance of the n e w
methods, rather than to c o m p e t e through prtce
reductions (Baran & Sweezy, 1966, p. 66;
 COST ACCOUNTING,LABOURAND CONGLOMERATES
Aghetta, 1979, p. 305). The idea of preserving
relationships by compensating the workforce
for revised working arrangements probably
reached its apogee in the 1948 General Motors/
United Auto Workers settlement which incor-
porated an "escalator clause" w h e r e b y wages
w e r e related to the cost of living, and an
additional " i m p r o v e m e n t clause" intended to
reflect the long-term prospects for improved
productivity, even though Sloan believed that
productivity increases had little to do with the
efforts o f the workforce (Sloan, 1986, p. 397).
In o r d e r to show the detailed connections
b e t w e e n budgetary controls and primary sector
e m p l o y m e n t practice, it would be desirable to
study both in the context of a single monopolis-
tic corporation from the 1930s onwards. At the
moment, unfortunately, published material of
this type seems to be lackmg. However,
Johnson and Kaplan ( 1 9 8 7 ) offer a detailed
study of the accounting system of the E.I.
DuPont de Nemours P o w d e r Company as it
existed in 1915, and, in view o f the success of
this system, it is not unreasonable to suppose
that it continued unchanged in essentials for
some decades thereafter. As for the company's
e m p l o y m e n t practices, these have not been
extensively studied, possibly because DuPonts
have n e v e r e x p e r i e n c e d large.scale industrial
conflict. Nevertheless, the studms of Weber
( 1 9 5 9 ) and Rezler ( 1 9 6 3 ) enable at least the
outlines o f the company's labour relations
policies to b e discerned. Despite its limitations,
this evidence gives some indication of h o w the
use o f accounting systems for prtcing pohcy
and planning related to welfarism as an aspect
o f labour relataons policy in the monopoly
sector, from the 1930s onwards.
Pricing policy, planning and welfarism in
monopoly capitalism
Johnson and Kaplan intend the study of the
1915 management accountang system at E.I.
DuPont d e Nemours P o w d e r Company to be an
illustration of h o w entrepreneurs developed
accounting systems to realise the profit poten-
tial o f vertical integration. The records studied
date from a time w h e n the manufacturing
429
resources of the company consisted of m o r e
than forty geographically dispersed mills, manu-
facturing three broad classes of product Verti-
cal integration consisted of the incorporation of
the selling function within the company, rather
than relying on agents as was then the custom,
and of headquarters control of purchasmg"
rather than the devolution of this function to
individual mills
According to Johnson and Kaplan, the return-
on-investment formula devised by DuPont "Is
an ideal tool for controlling, with accounting
numbers, any vertically integrated company's
operations" By providing information on the
"mternal efficiency of capital across the three
functional departments", the system enabled
"the Powder Company's top management to
effectively supplant capital markets m dectding
h o w to allocate resources within the American
explosives industry" (all quotes from Johnson
& Kaplan, 1987, p. 84). Fascinating as is
Johnson and Kaplan's case material, it scarcely
bears this interpretation.
The DuPont company was formed during the
great American merger wave of the turn o f the
century, during which "almost one-half of firm
disappearances, and seven-tenths of merger
capitalisations w e r e accounted for by mergers
that gained a leading position in the market"
(Nelson, 1959, pp. 102, 103). By 1907, the
company controlled between 64% and 100%
o f the entire American market for the various
types of explosive. An anti-trust action of 1911
resulted in a division of the corporation mto
three parts, but DuPonts still dommated the
p o w d e r business and continued to acquire
more companies (Laidler, 1931, p. 306) This
was quite typical o f the period, the over-
whelming majority o f mergers at the tame w e r e
hortzontal rather than vertical, with the latter
predominating only in the primary metals
industries, " ( w h i c h ) suggests that the econo-
mies of vertical integration, upon whmh many
merger students have placed great stress,
played a relatively small role in the merger
m o v e m e n t " (Nelson, 1959, pp. 102, 103).
The data provided by Johnson and Kaplan sit
more comfortably with Nelson's mterpretataon
430 TREVOR HOPPER and PETER ARMSTRONG
than their own. To describe as "vertically
integrated", a c o m p a n y of forty or so basically
s i m i l a r tlnillg, i n w h i c h vertical integration
consists only of the internal administration of
sales and the p r o d u c t i o n of one of the two
major r a w materials is a very partial view.
N o r does J o h n s o n and Kaplan's detailed study
o f the accounting system support the notion
that it was primarily used to decide the
allocation of resources b e t w e e n the three
major vertically Integrated activities (purchas-
ing, manufacture and sales). Only the purchas-
ing system seems to have b e e n used in this
manner, the information being used to evaluate
the likely return from takang a financial interest
in raw material supplies. The sales system
appears to have b e e n used as a tool for setting
prices and motivating the sales force, rather
than as a m e a n s o f assessing the resources to
invest in the sales effort. The manufacturing
system was used to c o m p a r e the performance
of the p o w d e r mills, with a view to deciding
w h i c h of these to expand and which to close
during phases of rationalisation. In other words,
the major decisions o f allocation made on the
basis of DuPont's accounting system seem to
have b e e n b e t w e e n similar, manufacturing
establishments. Such a system ts m o r e properly
described as an instrument of the rationalisa-
tion of horizontally m e r g e d p r o d u c t i o n resour-
ces than as a means of allocating investment
b e t w e e n vertically integrated activitms.
T h e detail of the sales accounting system
given b y J o h n s o n ( 1 9 7 5 ) suggests that it was
used as an instrument of planning, so as to
c o u n t e r trade fluctuations and control competi-
tion. Data o n the capital invested in each
p r o d u c t line w e r e used to calculate the aggre-
gate desired earnings for that p r o d u c t in
a c c o r d a n c e with the c o m p a n y ' s return-on-
investment target. This earnings target was then
used to calculate the mark-up per u m t at
normal and m a m m u m capacity, which was
added to unit p r o d u c t i o n costs to ymld a
c o m p a n y - w i d e m i n i m u m price for each pro-
duct. This p r o c e d u r e might be regarded as an
early p r o t o t y p e of the later practace of
monopolistic American corporations, of pro-
tecting profits by explicitly building wage costs
into their price structures.
Decisions on actual prices, subject to this
c o m p a n y minimum, w e r e devolved, so as to
take advantage of local market conditions. The
strategy of branch sales managers was to set the
general level nf district prices as high as they
could without encouraging the entry of n e w
competitors. Individual salesmen w e r e paid on
an incentive system which encouraged t h e m to
maximise total revenue ( t h r o u g h adjusting
prices), rather than sales volume, thus insulat-
ing the company's manufacturing operations, to
s o m e degree, from market fluctuations. This too
could be regarded as an anticipation of the later
advocacy of seasonal price changes to smooth
d e m a n d b y the " e m p l o y m e n t stahilisation"
m o v e m e n t of the 1930s (Douglas & Director,
1931, p. 85), though the aim in DuPont's case
was to operate the mills at full capacity rather
than to stabilise e m p l o y m e n t as such.
The c o m p a n y ' s policy on competition exhibt-
ted the same priorities. Rather than attempting
to gain a c o m p l e t e monopoly, DuPonts toler-
ated smaller, higher cost competitors since
these served to insulate the production
facilities of the c o m p a n y from market fluctua-
tions. To this end the company's prices w e r e
increased to the point w h e r e it was estimated
that the m o r e efficient competitors could make
an adequate return, though not to the point
w h e r e n e w c o m p e t i t i o n was encouraged
(Chandler & Salsbury, 1971, p. 155). This
policy can b e seen as an early version of a
similar pricing policy (ironically) forced o n t o
the American aluminium ingot and fabrication
m o n o p o l y Alcoa, by a district court judgement
of the 1930s. Alcoa w e r e forced to sell ingot to
c o m p e t i t o r fabrication companies at prices
which would allow these a reasonable profit at
the Alcoa prices for fabrications (Kaplan et aL,
1958, p. 30), thus providing the c o m p a n y with
a warrant for setting prices on the basis of their
smaller competitors' costs rather than their
own.
This aspect of the DuPont m o n o p o l y pricing
policy, of course, d e p e n d e d o n keeping the
company's p r o d u c t i o n costs b e l o w those of its
 COST ACCOUNTING,LABOURAND CONGLOMERATES
c o m p e t i t o r s (Chandler & Salshury, 1971, p.
155). To this end, as is stressed b y Johnson and
Kaplan, the p r i m e costs o f p r o d u c t i o n w e r e
r e p o r t e d b o t h to mill superintendants and to
c o m p a n y headquarters, so providing the f o r m e r
with p o w e r f u l incentives to minimise these
costs. The p o i n t h e r e is that the maintenance of
p r o d u c t i o n costs b e l o w those of competitors
was only o n e aspect of the DuPont c o m p a n y
strategy. The o t h e r aspects, namely the allo-
cation of resources b e t w e e n horizontally
m e r g e d p r o d u c t i o n facilities and a m o n o p o l y
pricing policy w h i c h aimed at securing a steady
long-run r e t u r n - o n - m v e s t m e n t whilst insulating
manufacturing operations from market fluc-
tuations, w e r e equally important and equally
d e p e n d e d u p o n the c o m p a n y ' s internal accoun-
ting system. Whereas J o h n s o n and Kaplan argue
that the information relevant to the contain-
merit o f p r o d u c t i o n costs should not contain
arbitrary allocations of overhead, it is clear that
decisions o n pricing policy must include s o m e
allocation o f overhead. To the extent that
decisions o f the latter type c a m e to p r e d o m -
inate m the m o n o p o l y sector o f the American
e c o n o m y f r o m the 1930s onwards, the inclu-
sion o f o v e r h e a d allocations in p r o d u c t costings
( o n w h a t basis is a separate question) need not
b e s y m p t o m a t i c o f "relevance lost" at all.
To w h a t e x t e n t was DuPont's pricing policy
the i n s t r u m e n t o f an a c c o m m o d a t i o n with
p r i m a r y s e c t o r labour~ As has b e e n indicated,
the paucity o f information on labour relations at
the c o m p a n y m e a n s that any answer must
involve s o m e e l e m e n t of conjecture. It is clear
f r o m the w o r k o f Rezler (1963), however, that
t h e r e has n e v e r b e e n a policy of a c c o m m o -
dation with trade unionism as such at the
DuPont company. The 1960s' philosophy o f the
e m p l o y m e n t relationship remained as individ-
ualistic and anti-union as that of the c o m p a n y ' s
founders. Until the National Labor Relations Act
of 1935, the company, like others in the U.S.
chemical industry, cultivated " e m p l o y e e repre-
sentation plans" as a means of deflecting
d e m a n d s for genuine trade unionism (Weber,
1959). Following the N e w Deal, however, these
served as the organisational basis for the later
431
d e v e l o p m e n t of independent local unions
(plant level unions, not affiliated to national
organisatlons). By 1940, about 9096 of the
DuPont workforce was organised in this fash-
ion, partly as a result o f the c o m p a n y ' s policy of
bargaining only on a plant-by-plant basis. By
1960, however, the p r o p o r t i o n of the work-
force organised by independent locals had
d r o p p e d to u n d e r 60%, with nationally organ-
ised trade unions gaining a beachhead of 6%
and the rest unorganised. Meanwhile the real
influence of trade unionism in the c o m p a n y
and thus the a c c o m m o d a t i o n with the demands
of primary sector labour w c a m e about through
the c o m p a n y ' s policy of outflanking trade
unionism b y r e m o v i n g the apparent need for it.
On the basis of survey information, the
m a n a g e m e n t of each plant ensured that wages
w e r e at least as high as those prevailing in the
locality. In the process, a careful eye was kept
on the advances achieved b y trade unions. In
1956, for example, DuPont's president stated
that the average wage at C o m p a n y # a n t s was
$2.46 p e r h o u r c o m p a r e d with $2.05 p e r h o u r
at comparable unionised plants (Weber, 1959).
Welfare benefits formed an important part of
the strategy. Apart from the intrinsic welfare
utility of stable e m p l o y m e n t , partly m a d e
possible by the insulation o f manufacture from
market fluctuations through the agency of the
sales accounting system, benefits included
g r o u p life insurance, accident and health insur-
ance, pensions and a vacation plan. The inten-
tion was to p r o v i d e a substantial measure of
e c o n o m i c security for xhe workers, at least
whilst they remained e m p l o y e e s of the com-
pany. By the 1960s, the costs o f these welfare
p r o g r a m m e s was claimed by a c o m p a n y spokes-
man to c o n s u m e 26% of the total wage bill
(Rezler, 1963). In o r d e r to ensure that these
welfare benefits w o u l d b e effective as a means
of combating trade unionism, the c o m p a n y also
needed to ensure that trade unions could not
claim any of the credit. To this end, trade union
influence on welfare benefits was excluded b y
deciding these issues at headquarters, whiisr
restricting bargaining to plant level. To the
DuPont company, the unionisation o f any plant,
432 TREVORHOPPERand PETERARMSTRONG
even by an independent local, represented a
managerial failure, and was followed by an
investigation aimed at "putting things right"
The post-1940s' fall in union membership
within the c o m p a n y was testimony to the
success of these measures
Thus, from the time trade unionism became a
force to be reckoned with in the U.S. chemical
industry m say from the 1930s onwards
(Weber, 1959) - - the determination of wages
and benefit levels within the DuPont company
started from the requirements of labour policy,
rather than those of p r o d u c t markets. Whilst
unit labour costs were mininused through
productivity increases (see Rezler, 1963, p.
189, for the 1950s' record in this respect),
wage rates and benefits w e r e set on the basis of
what was required to sustain the accommo-
dation with labour on which the anti-union
policy depended. Assuming that the sales
accounting system remained essentially stmilar
to that of 1915, c o m p a n y minimum prices
could then be set, within semi-monopolised
markets, so as to maintain the planned level of
return-on-investment.
What this evidence indicates is that, in the
DuPont c o m p a n y from the 1930s onwards,
there was a m o n o p o l y pricing policy, based
u p o n the sales accounting system, which
c o v e r e d the costs o f a welfarist employment
strategy and w h i c h insulated the manufacturing
function from market fluctuations, with a conse-
q u e n t stabilisation of employment levels.
Whilst the stabilisation of employment may
have been a by-product of a p o h c y destgned in
the first instance to maximise plant utilisatton,
and whilst the overt aim of the employment
strategy may have been the excluston of trade
unionism rather than welfarism for tts own sake,
the resultant e m p l o y m e n t policy still adds up to
one of r a p p r o c h e m e n t voth primary sector
labour.
Overhead allocation a n d the targetmg o f
secondary sector labour costs
J o h n s o n and Kaplan argue that the practice of
allocating redirect costs on the basis of dtrect
labour costs is arbitrary and tends to make
labour-intensive processes appear more costly
than they should, with consequent distortions
m firm's manufacturmg policies. Leaving aside
the question of h o w indirect costs should be
allocated, it can be argued that present practice
fits well with another feature of core corpora-
tions m the era of labour segmentation. As
noted above, a segmentation of labour markets
has taken place w i t h i n some of these, with
primary and secondary sector conditions coin-
ciding roughly with capital and labour-intensive
processes On the whole, workers on m o d e r n
labour-intensive processes tend to be unskilled
(or defined as such), are easily substitutable
from external labour markets and, in conse-
quence, are weakly unionised. The bargainmg
position of workers on capital-intensive pro-
cesses, on the other hand, is much stronger,
either because of their extensive training or
because of their responsibility for expensive
plant. In consequence the latter are less
vulnerable to managerial attempts to intensify
their labour and downgrade their employment
conditions (Rubery, 1978; Armstrong, 1982).
In this situation, there may be a lot of
capitalistic sense in incorrect allocations of
costs w h i c h t h r o w the pressure to minimise
dtrect costs disproportionately on the managers
of labour-intensive processes - - for these are
where the resistance of labour to further
intensification and casualisation is likely to be at
its weakest. Information on the true costs of
capttal-intensive process, on the other hand,
may be relatively useless, since there may be
little scope for the reduction of costs by
technical means in an up-and-running system
and primary sector labour, in any case, is likely
to be highly resistant to any attempt at
intensification.
In other words, ff cost reformation is regar-
ded prtmarily as a means of directing effort,
rather than as a representation of reality, it can
be argued that the distortions of contemporary
cost accounting systems serve to focus that of
managers precisely w h e r e it is most likely to
ymld results. True to their realist conception of
cost information as a basis for rational econo-
mtc deciston-making, however, Johnson and
 COST ACCOUNTING, LABOURAND CONGLOMERATES
Kaplan argue that overestimates of the true
costs o f labour intensive operations m a y lead
managers to abandon these unnecessarily in the
face o f overseas competition. Whilst this m a y
b e true, it is equally possible tlmt the threat of
doing so m a y enable these same managers to
drive s e c o n d a r y s e c t o r labour costs even l o w e r
than they really n e e d to b e in o r d e r to m e e t the
competition. W h e r e initiatives of this type are
successful, c o r p o r a t e m a n a g e m e n t cannot b e
e x p e c t e d to b e greatly c o n c e r n e d if the in-
formation o n w h i c h they are based is inaccu-
rate, or if the c o n s e q u e n t increase in overall
profit ts incorrectly attributed to capital-inten-
sive operations. As for the effect on p r o d u c t
pricing policy, given the relative absence of
c o m p e t i t i o n in m a n y American p r o d u c t
markets b e t w e e n a b o u t 1930 and 1960, finely-
t u n e d p r o d u c t costs for strategic decision-
making p u r p o s e s m a y have b e e n a secondary
consideration in p r i m a r y sector corporations.
O f course, this situation has changed with the
rapid g r o w t h of Japanese and o t h e r Far-Eastern
competition, and m u c h of the present-day
relevance o f Relevance Lost derives precisely
from that fact.
CONCLUSION AND POSTSCRIPT: SOCIAL
TRANSFORMATION AND COST
ACCOUNTING TODAY
Relevance Lost seeks to inform current
a c c o u n t i n g p r o b l e m s through historical analy.
sis. Whilst the i m p o r t a n c e o f this is undeniable,
it is questionable w h e t h e r transaction cost
theory is an adequate theoretical tool for the
purpose.
The intention o f this p a p e r has b e e n to
establish that there is a p r i m a - f a d e case for
considering accounting d e v e l o p m e n t s in the
light o f labour process histories of capitahst
organisation. The potential of this b o d y of w o r k
for accounting research has b e e n argued else-
w h e r e ( H o p p e r et aL, 1986; H o p p e r et aL,
1987).
Following G o r d o n et aL (1982), the p a p e r
has sought to establish that there is a relation-
433
ship b e t w e e n systems of accounting informa-
tion and phases in the evolution of capitalist
control of the labour process. Systems of
control b o t h entail costs and p r o v o k e charac-
teristic forms of resistance which, under com-
petitive conditions, r e n d e r them increasingly
ineffective as means of capital accumulation..
These contradictions build into crises o f con-
trol, especially in times of e c o n o m i c recession,
and this leads to a search for n e w systems of
controlling the labour process, either directly
or through its immediate management. This
p a p e r has sought to establish that s o m e o f the
key phases of innovation in cost and manage-
m e n t accounting can be understood as part of
this search for n e w methods o f control.
Thus d e v e l o p m e n t s in accounting for direct
labour costs w e r e implicated b o t h in the
employers' liquidation of internal contract and
in the curbing and focusing of the p o w e r of the
salaried f o r e m e n w h o replaced them. Standard
costing systems w e r e p i o n e e r e d as an aspect of
the fragmentation and deskilling o f craft labour,
which had hitherto resisted employers'
attempts at intensification through p i e c e w o r k
p a y m e n t systems. O n c e the American industrial
engineers had gained control o v e r working
methods, it b e c a m e possible for t h e m to make
"scientific" decisions on the p a c e of work, and
to issue these in the form o f standard costs.
As organisations g r e w in size and complexity,
the p r o b l e m of securing middle m a n a g e m e n t
c o m m i t m e n t to the demands of capital owner-
ship for secure dividends was addressed b y the
d e v e l o p m e n t o f the return-on-investment
measure. A re.examination o f the General
Motors case r e p o r t e d b y Johnson and Kaplan
indicates that the effectiveness of this measure
depended, at least in part, on the "drive system"
of e m p l o y m e n t and anti-union campaigns
which secured the freedom of middle managers
to t h r o w the costs of e c o n o m i c fluctuation and
recession directly o n t o the worlcforce.
Subsequently, the drive system ran into, and
partially created, the American recession of the
1930s, from w h i c h there e m e r g e d a resurgent
labour m o v e m e n t and a government committed
to s o m e measure o f legislative support for trade
434 TREVOR HOPPER and PETER ARMSTRONG
unionism and e m p l o y m e n t stability. In these
circumstances, the relevance of the accounting
systems o f the 1920s was indeed lost. Manage-
merits b e c a m e less able to a c t on accounting
information w h i c h told t h e m where, and by
h o w much, to cut direct labour costs. Instead,
large corporations, aided by the m o n o p o l y
positions w h i c h they increasingly enjoyed,
b e g a n to e m p l o y budgets for the very different
p u r p o s e of preserving an accord with their core
labour forces b y means of m o n o p o l y pricing
policies. J o h n s o n and Kaplan describe an early
p r o t o t y p e of this strategy in their case study
of DuPont, though the purpose there was
apparently to k e e p manufacturing plant fully
o c c u p i e d rather than to provide stable employ-
m e n t as such. W h e n used as an instrument of
m o n o p o l y pricing policies, apportioned in-
dtrect costs b e c a m e relevant in cost accounting
systems, as o p p o s e d to the p r i m e costs relevant
to m a n a g e m e n t decisions on manufacturing
methods.
In the phase o f capitalist d e v e l o p m e n t des-
cribed b y G o r d o n et aL ( 1 9 8 2 ) as one of
"segmentation", this a c c o m m o d a t i o n with lab-
o u r was restricted to a p r i m a r y sector of core
operations within core corporations.
Elsewhere, In the competitive sector o f the
e c o n o m y and in the small suppliers to core
corporations, secondary sector e m p l o y m e n t
conditions continued. Indeed, by throwing the
effect o f e c o n o m i c fluctuations and d o w n t u r n
o n t o s e c o n d a r y sector firms, core corporations
w e r e able, in effect, to use the insecurity and
l o w wages o f secondary sector e m p l o y m e n t as a
m e a n s of subsidising their a c c o m m o d a t i o n with
their o w n labour forces.
T h e r e are signs that the boundaries of this
a c c o r d are n o w being redrawn. Whilst parts of
the i n d e p e n d e n t primary sector of managers
and professionals remain protected, the bureau-
cratic and costly apparatus of control m large
c o r e conglomerates, w h i c h had e m e r g e d in
m o r e benign e c o n o m i c conditions than the past
fifteen years or so, is increasingly being ques-
tioned w i t h c o n s e q u e n c e s for the control and
e m p l o y m e n t p r o s p e c t s of lower levels of
management. Similarly, condttions m the subor-
dinate primary sector of skilled manual workers
are increasingly u n d e r attaclc Anti-union drives
and threats o f plant closure have enabled
employers to claw back previous trade union
gains on wages and e m p l o y m e n t security.
Edwards (1979, p. 157) argues that the accord
with subordinate primary sector labour c a m e
u n d e r pressure in the early 1970s w h e n the oil
crisis precipitated a series of e c o n o m i c and
social crises. Under these conditions, "For the
firm, bureaucratic control threatens to b e c o m e
a pact with the devil thaL while offering
temporary respite from trouble, spells long-term
disaster. The reason ts simple: bureaucratic
control speeds up the process of converting the
wage bill from a variable to a fixed cost."
For these reasons, the present may well turn
out to be a period of exploration from which
n e w forms of control of the labour process and
its immediate m a n a g e m e n t may emerge. T h e r e
are parallels with the British context, in w h i c h
debates o n "Japanisation" (IndustrtalRelations
Journal, 1988) and "flexibility" (Pollert, 1991),
b o t h tacitly predicated u p o n the destruction of
current trade union rights, n o w clog the
academic and practitioner journals. In this
context, current accounting research obsess-
ions with agency theory, downscaling and
financial rewards, far from being irrelevant to
real-life p r o b l e m s as Johnson and Kaplan be-
lieve, make a good deal of sense. Agency theory,
m particular, offers a n e w "scientific" rattonale,
and s o m e practical guidance, for tying the
rewards of managers to their success in rolling
back the previous gains made b y labour and
treating it as a variable and expendable cost
(see Metcalf, 1989, on the effects of such
initiatives on macro-measures of British labour
productivity). Likewise, the attraction to firms
of activity costing may lie in its potential for
questioning the continued need for
bureaucracies and bureaucrats w h o s e functions
originated not in the quest for corporate
efficiency but in the search for a labour/capital
accord and associated m o d e s of control which
are n o w perceived as redundant.
In the American context, the mroads of
Japanese manufacturers have b e e n such that
 COST ACCOUNTING, LABOUR AND CONGLOMERATES 435

Harvard Business School itself, so long the high
temple of strategic management, is now the
headquarters of a sect which reasserts the
centrality of manufacturing policy (Hayes &
Abernathy, 1980; Skinner, 1985) The work of
Johnson and Kaplan, with its concern to adapt
management accounting to new manufacturing
technologies and Japanese systems of organisa-
tion, needs to be seen as part of this intellectual
ferment. It is likely that Relevance Lost, w i t h its
resonant assertion that management accounting
systems are to be judged solely by their relevance
to managerial decisions on man-f~cturing pro-
cesses, however historically inadequate (as
this paper has hopefully demonstrated), may
turn out to be an important moment in the
search for a leading role for accounting in new
forms of control of the labour process.
On the other hand, there are reasons for
expecting the influence of financial reporting
on management accounting systems to increase
rather than decrease. Burawoy (1985) sees the
present intensification of internatzonal com-
petition and the potential mobility of capital in
multinational conglomerates as creating the
conditions for new regimes of corporate con-
trol in which financial reports are used to
reassert the primacy of capital accumulation at
the level of operating subsidiaries. Thus plant-
level accommodations with primary sector
labour (regimes of "factory hegemony" in
Burawoy's terminology) may be preserved
through the common interest of plant-level
management and labour in preventing the flight
of capital At the same time, these may be
subjected, through financial accounting reports,
to the discipline of internal capital markets. If
Burawoy is correct, and this hegemonic despoosm
is indeed the map of the future, corporate-level
management accounting may continue to pay
little attention to the prime costs of production
and regard these as an internal matter for
establishment-level managements in their com-
petition for investment capital If this per-
petuates the games of financial entreprenenrship
currently played with overhead allocation by
the managers of operating subsidiaries (and
much decried by Johnson & Kaplan), the result
may be a continuation of the loss of relevance
to manufacturing policy of management accoun-
tancy. However, because individual companies
may be able to evade the consequences by
astute policies of acquisition and divestment,
the costs may ultimately appear in the U.S.
balance of payments figures rather than in the
balance sheets of the companies concerned.

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