Professional dominance: The relationship between financial accounting and managerial accounting, 1926-1986

Accounting Historians Journal, The, Dec 2002 by Richardson, Alan J

In order to achieve integration, it was necessary to fully allocate costs to products. This resulted in arbitrary allocations that distorted the costs of particular products:

... perhaps the most obvious example of external reporting's overriding and distorting influence on the internal accounting system is the arbitrary allocation of joint production costs ... Decisions are made on the basis of opportunities taken and rejected but the system does not record opportunity costs ... there appears to be sufficient evidence to suggest that financial accounting practices destroy or limit the usefulness of much accounting data [Burrows, 1974].

Many of the early publications in Cost and Management were descriptions by members of the Society of the cost accounting system installed in their place of employment. In later years, similar articles were produced as extracts from the "theses" that the Society required students to submit to qualify for their designation (these appeared between 1941 and 1965 [Allan, 1982, p.72]). For the most part these papers describe the integration of cost accounts with the general ledger without comment on the managerial usefulness of this procedure [Selby, 1940; Hood, 1929; Lanthier, 1930]. In other words, the integration of cost accounting systems with the general ledger was a taken-for-granted part of accounting practice that did not need to be bracketed and explained (consistent with Smails'[1939] comment quoted above). The only exception to the integration of cost accounts with the general ledger was in firms which used a standard cost system for performance measurement or pricing [McKnight, 1950; Ripley, 1960; Nelles, 1949]. In these cases a separate set of records was used for specific management purposes but this appears to have been unusual. For example, McKnight [1950, p. 316], in describing his company's cost system, notes that "this company has not accepted the popular trend toward standard costs as a composite part of the accounting system."

An issue that consumed many pages of Cost and Management was the effect of inflation on internal accounting information. There was widespread agreement that failure to deal with inflation had adverse consequences, particularly in terms of the tax liability faced by the firm, but management accountants were unable to abandon the historic cost basis required for external reporting:

Industrial accountants must, more efficiently and directly, cost for the future and let past records be maintained for tax purposes [Editorial, 1947].

How can we expect the fiction of the stability of the dollar to be discarded by our tax lawmaker if we do not even dare to deviate from this fictitious concept for our internal accounting purposes [Editorial, 1957b].

There had been very little progress in the creation of financial accounting standards for inflation-adjusted accounting. Zlatkovich [1975] saw the lack of financial reporting standards for inflation as an opportunity for management accountants to experiment with alternate formats. He also saw that once an inflation-adjusted financial accounting standard was developed, management accounting would become subordinated to that standard: