It is always interesting to see where ideas come from. Therefore, I was interested to read Johnson and Kaplan’s history of management accounting; Relevance Lost. This noted how a few important accounting ideas in business developed.
Du Pont Return On Investment Model
F. Donaldson Brown developed one of the most impressive views of business that I have seen. This is a thing of beauty. The basic inputs of the firm come together to create a return. Brown’s model is an excellent way of thinking about production. It shows how the firm’s operations can lead to performance.
The idea for the Du Pont return on investment formula … originated, as far as we know, with F. Donaldson Brown, a college trained electrical engineer and one-time electrical equipment salesman…
Johnson and Kaplan, 1991, page 86
I wonder whether Brown benefited from his experience in both sales and engineering. The model clearly shows a view of the organization as a system. It also does a great job linking everything to sales. This seems like an important development. It was a very impressive step forward for the time.
Accounting Ideas In Business: Flexible Budgeting
The flexible budget distinguished between variable and fixed costs and thereby forecasts total costs and profits at any level of output (within a given amount of fixed capacity).
Johnson and Kaplan, 1991, page 110
Apparently, before the 1920s the flexible budget was barely discussed. It is strange to imagine having a budget without thinking about what happens if things change. If you sell more will someone blame the production manager for the cost overrun? What were those conversations like? I have no idea really.
Much that I admire Johnson and Kaplan I do think their quote helps illustrate something important. Namely their accounting viewpoint. Note that profits seem to come from output. Surely you need to sell the output too?
Education’s Role In Financial Accounting’s Primacy
As a fairly sobering view of the (negative) power of education, one tale stands out.
Accounting was virtually unknown in college curricula before 1900; its subsequent development was shaped largely by the demand to train students for public accounting. The theory and problems of financial reporting has comprised virtually all the required courses…. That they ultimately used financial accounting data as a major source of information for managerial decision making should not, therefore, be surprising.
Johnson and Kaplan, 1991, page 135
The importance of accounting ideas in business is obvious. Therefore, it can be of great benefit to marketers to learn a bit more about them.
For more on accounting see here.
I also recommend marketing accounts. These are management accounts designed with marketing in mind — see here.
Read: H. Thomas Johnson and Robert Kaplan (1991) Relevance Lost: The Rise And Fall Of Management Accounting, Harvard Business School Press
