Management And Accounting Web

Boer, G. and D. Jeter. 1993. What's new about modern manufacturing? Empirical evidence of manufacturing changes. Journal of Management Accounting Research (5): 61-83.

Summary by Michele Martinez
Ph.D. Program in Accounting
University of South Florida, Spring 2002

ABC Main Page | Overhead Main Page


Many writers on management accounting argue that labor is no longer a significant cost and that overhead is a growing and significant cost in manufacturing operations. At professional meetings and in academic journals claims are being made that drastic changes in the manufacturing environment are occurring and traditional cost accounting techniques are becoming obsolete. Thus, the purpose of this paper as stated by the authors is to examine the material cost and labor cost data for a variety of manufacturing industries for the years 1899 through 1987. Specifically, this paper reviews assertions made by accounting thinkers and empirical data related to the validity and generality of these claims. Moreover, the emphasis in the paper is to provide evidence of the extent to which manufacturing has changed over time and to examine the nature of these changes. Additionally, it is the authors purpose to provide similar data for as many industries as possible.

Popular Assertions made by Accounting Thinkers

Changes in the environment

Due to global competition, rapid introduction of new products, and new management techniques (JIT and self directed work teams) many feel that it is highly unlikely that the cost accounting and management control systems devised for the competitive environment of the 30th century can still be useful and effective in today’s information technology age.

Decline in Direct Labor

Cooper and Kaplan claim that direct labor now represents a small fraction of corporate costs, while expenses covering overhead functions have soared. This notion that the relative importance of direct labor is decreasing while overhead costs are increasing is widespread among academies. (See the Relevance Lost Chapter 8 summary for Johnson and Kaplan's discussion of direct labor).

Increase in Overhead

If the assertions about declining direct labor are correct, then a resulting increase in the relative importance of labor not directly involved in producing the product and other components of manufacturing overhead should occur. Several authors address this issue stating that not only is overhead growing as a proportion of total cost, but that manufacturing overhead now represents about a third of total manufacturing costs in a typical company.

Traditional Cost Systems

It has been noted that nearly all academicians agree on one thing: the inadequacy of traditional product costing systems. Academicians felt that the traditional cost system leads to distortion of costs. In addition, claims are made that traditional systems are often so inaccurate that they encourage management to adopt strategies that inhibit the improvement of manufacturing.

Empirical Development

To examine the labor related issues, the authors gathered data from U.S. government reports to address the following two questions:

1. Has production labor declined as a percentage of total manufacturing costs for all, most, or some industries over time?

2. Has the ratio of total wage expenditures to production wages increased for all, most, or some manufacturing companies over time?

For each of the principal questions, the authors examined the data to address two more additional issues:

1. To ascertain whether the change, if such a change is detected, occurred abruptly or gradually over time.

2. To identify whether the behavior of these variables has been uniform or diverse across industries.

The above two questions were developed to ascertain if in fact, traditional cost accounting is outdated, at what point did this obsolescence occur? Was it gradual or sudden? Specifically, the authors were concerned with determining whether a shift occurred in manufacturing; whether or not the shift was uniform across industries, will trends observed in certain industries sweep other industries in the future?

Sample selection and data analysis

Data was collected from the U.S. Department of Commerce Census of Manufacturers (provided by SIC code).

Data was collected for the period 1899-1987.

Data was collected for two samples: one including all industries for which data was available for the entire period (1899-1987), and the second including industries expected to exhibit the characteristics asserted by critics of current cost accounting.

Data consisted of total wages and salaries paid, amounts paid for production labor, cost of material used, and value of goods shipped.

Limitation of labor data – the department’s definition of Production labor includes all labor engaged in production, which makes it difficult to derive strong statements about what’s happening between direct labor and overhead since both are mixed together into one category of Production labor.

Labor Cost significance

To examine the statement that labor is rapidly becoming an insignificant part of total manufacturing expense the authors computed manufacturing labor as a percentage of sales for each year.

Figure one (p. 66) reveals that at its highest labor accounted for 20% of sales and began to decline around 1950.

Figure 2 (p. 69) shows that the change in relative importance of labor costs varies from one industry to another, and the data does not support the notion that production labor has declined as a percentage of total manufacturing costs for all industries over time.

Figure one also shows that no common year emerges to signal the beginning of labor costs decline in any one industry.

Overall, it was shown that changes in labor as a percentage of sales did not occur at any specific point in time, did not occur uniformly across all industries, and did not decline for all industries.

Overhead Cost significance

To examine the assertion that overhead costs as a portion of total manufacturing costs had exploded the authors developed a surrogate for overhead since the data was not provided directly. Thus, they divided total expenditures for wages and salaries by the cost of production.

Figure 3 (p. 74) shows that overhead costs started to increase around 1950.

The increase in overhead costs varies across industry.

In an effort to reduce bias the authors chose a select sample from modern industries and performed the analysis again. They found that in general the results for the selective sample were consistent with the larger sample.


Data indicated gradual changes in production labor and material costs over time, with no sudden or abrupt changes to signal the start of "modern manufacturing."

Production labor cost significance varies across industries, although there is a general decline in its importance over time for most industries.

Overhead costs increases for some industries and stays constant or decreases for other industries.

In 1987 the statement can be made that production labor cost is relatively insignificant for some industries and relatively significant for others.

Sufficient variation across industries exists in the extent and nature of the changes to suggest that no single approach to structuring cost accounting systems is likely to be optimal for all industrial organizations or sectors.


Related summaries:

Cooper, R. 2000. Cost management: From Frederick Taylor to the present. Journal of Cost Management (September/October): 4-9. (Summary).

Horngren, C. T. 1989. Cost and management accounting: Yesterday, and today. Journal of Management Accounting Research (1): 21 - 32. (Summary). This paper was originally published in Hopwood, A. and M. Bromwich, eds. 1986. Research and Current Issues in Management Accounting. London: Pitman Publishing Ltd.

Johnson, H. T. 1987. The decline of cost management: A reinterpretation of 20th-century cost accounting. Journal of Cost Management (Spring): 5-12. (Summary).

Johnson, H. T. 1992. Relevance Regained: From Top-Down Control to Bottom-up Empowerment. The Free Press. (Summary).

Johnson, H. T. and A. Broms. 2000. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. The Free Press. (Summary and additional Graphics and Notes).

Johnson, H. T. and R. S. Kaplan. 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. (Summaries and additional information).

Kaplan, R. S. 1984. The evolution of management accounting. The Accounting Review (July): 390-418. (JSTOR link). (Summary).

Martin, J. R. Not dated. 200 years of accounting history dates and events. Management And Accounting Web.

Noreen, E. 1987. Commentary on H. Thomas Johnson and Robert S. Kaplan's Relevance Lost. Accounting Horizons (December): 110-116. (Summary).

Vollmers, G. L. 1996. Academic cost accounting from 1920-1950: Alive and well. Journal of Management Accounting Research (8): 181-199. (Summary).