Management And Accounting Web

Frank, W. G. 1990. Back to the future: A retrospective view of J. Maurice Clark's Studies In The Economics of Overhead Costs. Journal of Management Accounting Research (2): 155-166.

Summary by Jodi Corcoran
Master of Accountancy Program
University of South Florida, Fall 2004

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Frank views Clark's 1923 book, "The Economics of Overhead Costs"1 as an “accounting classic." Frank writes this retrospective view to show how contemporary accounting issues today mirror that of the past, specifically the search for relevance. Frank highlights the parallels between Clark's insightful writings and the writings of M. Edgar Barrett, G. Benston, Sidney Davidson, and Robert Kaplan.

Basic Cost Concepts from J. Maurice Clark

Clarks’ Concept of Overhead Costs

According to Frank, Clark notes the lack of proportionate variability of overhead with output and acknowledges that overhead must be treated differently than direct variable costs.

Different Cost Concepts

Frank lists Clark’s nine different decisions (Clark, chapter 9) for which Clark suggests accumulating different costs or measurements in order to find equitable solutions. Clark further suggests that different individuals may be better suited to make different decisions.

Frank compares Clark’s catalog of cost concepts to the first chapters of most modern texts. Clark distinguishes between cost concepts still very controversial today.

Variable and Constant (or fixed ) Costs - Frank points out Clark’s understanding of cost variability. Again, Frank parallels Clark’s work to modern texts. Not only does Clark discuss two ways to estimate fixed and variable costs, but he also warns of the limitations of each. One such limitation mentioned is the difficulty in categorizing costs as fixed versus variable. Clark recognized most variable costs are not exactly proportionate to an activity and most constant costs do not remain so over time.

Methods of Identifying Costs with Products - Clark notes three ways to assign costs and makes several cautions very similar to ones given by G. Benston in an article published in The Accounting Review in 1966. This is another display of the relevance of Clark’s work to modern accounting.

How Clark Might Have Reacted to Some Contemporary Problems

Frank shows the relevance of Clark’s work in solving modern issues facing management accountants.

Relevant Costs in Barrett’s “Industrial Grinders Case” - In short this case is about a competitor coming out with a plastic replacement part appearing to have a significant cost advantage over an original metal part. The decision that must be made is whether to start producing the plastic parts. Three key issues are involved. What amount of overhead, materials, and direct labor are relevant in making the decision to produce the new part?

Frank takes specific passages out of Clark’s book to show how Clark would successfully address the three key issues.

Clark p. 21 “when we are choosing between two policies under both of which the same overhead outlay will have to be met, that overhead outlay is not part of the cost specifically traceable to either polity.”

Clark p. 55 “For some purposes, the cost of materials already bought…is a ‘sunk cost’ to the extent that it exceeds what the materials are now worth if sold or held for future use.”

Clark p. 51 “temporary…falling off in demand”

“…anything which serves to keep any part of the [labor] force occupied instead of turning them off…[in order to reduce]…the cost of building the force up again when business revives.”

“…goods may be worth producing which are not worth their ‘cost’ as the accounts show it.”

Frank adds that other accounting issues are involved, however Clark effectively deals with the relevant cost issues at hand.

Today’s Cost Accounting Problems and Tomorrow’s Cost Accounting Systems

Frank attempts to tie Clark’s ideas to the twentieth century. Frank compares Clark’s work from the twenties with three articles authored or coauthored in the eighties by Robert Kaplan.

From “Yesterday’s Accounting…”2 Frank shows how Clark and Kaplan have similar views concerning the best way to allocate different costs (direct labor hours may not always be the best driver), the significant difference between financial and management accounting, and the importance of intangible assets and trying to account for them.

From “One Cost System…”3 Frank shows how Clark and Kaplan both believe in the multiple uses of accounting. Kaplan refers to three major functions of a cost system: inventory valuation, operational control, and product cost management. Clark refers to ten processes of accounting of which Frank summarizes and connects to Kaplan’s functions. Frank promotes Clark’s recognition of “ different costs for different purposes.” However, Frank goes on to point out that due to the “primitive information processing technology” of Clark’s time, Clark did not go so far as Kaplan in addressing the need for multiple accounting systems.

From “Measure Costs Right…”4 Frank discusses the modern problem of miscosting. Kaplan and Cooper promote allocating costs directly to products in an “activity-based “ system rather than the “two-stage” system. Frank points out that Clark refers to a single product system (inadequate today) to keep things simple while addressing cost issues. Frank highlights (with excerpts) the similar belief of Kaplan and Clark concerning excess capacity costs not being added in product costs. (See the views of Gantt and Church on this issue in the related summaries listed below).

Frank makes a distinction between Clark and Kaplan’s use of accounting cost information. Clark uses the cost system to make decisions whereas Kaplan uses the cost system to signal for management’s attention.

Some Accounting Extensions to the Field of Economics

Clark mentions interdependence between businessmen and the state of the economy. According to Frank, Clark’s insights call for management accountants to significantly contribute more to the stability and success of the economy. Frank writes “These insights reinforce the notion that managerial accountants, because of their expertise in dealing with similar issues at the firm level, can also make significant contributions to cost-benefit measurements and cost analysis at the macro, social level.”


Frank quotes Santayana, “Those who cannot remember the past are condemned to repeat it.” Frank points out Kaplan’s warning against firms allowing financial accounting to impose on management cost systems. Frank refers to the need and the push to “reorient management accounting.” Finally, Frank refers to Relevance Lost by Johnson and Kaplan to promote the relevance of management accounting in the past and the need to regain that relevance in the cost systems of today.


1 Clark, J. M. 1981. Studies in Economics of Overhead Costs. The University of Chicago Press. Reprint of Clark's 1923 publication. For reviews of this book, see Davidson, S. 1963. Old wine into new bottles. The Accounting Review (April): 278-284. (JSTOR link); Paton, W. A. 1924. Studies in the Economics of overhead Costs. by J. Maurice Clark. Journal of The American Statistical Association (June): 257-259. (JSTOR Link); and Jackson, J. H. 1925. The Economics of Overhead Costs. The American Economic Review (March): 82-84. (JSTOR Link).

2 Kaplan, R. S. 1984. Yesterday's accounting and today's economy. Journal of Accountancy (November): 141-152.

3 Kaplan, R. S. 1988. One cost system isn't enough. Harvard Business Review (January-February): 61-66.

4 Cooper, R. and R. Kaplan. 1988. Measure cost right: Make the right decision. Harvard Business Review (September-October): 96-103.

Related summaries:

Brausch, J. M. and T. C. Taylor. 1997. Who is accounting for the cost of capacity? Management Accounting (February): 44-46, 48-50. (Summary).

Church, A. H. 1995. Overhead: The cost of production preparedness. Journal of Cost Management (Summer): 66-71. (Summary).

Cooper, R. and R. S. Kaplan. 1992. Activity-based systems: Measuring the costs of resource usage. Accounting Horizons (September): 1-13. (Summary).

Debruine, M. and P. R. Sopariwala. 1994. The use of practical capacity for better management decisions. Journal of Cost Management (Spring): 25-31. (Summary).

Gantt, H. L. 1994. The relation between production and costs. Journal of Cost Management (Spring): 4-11. This is a presentation Gantt made in 1915. (Summary).

Greer, H. C. 1966. Anyone for widgets? The Journal of Accountancy (April): 41-49. (Summary).

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

McNair, C. J. 1994. The hidden costs of capacity. Journal of Cost Management (Spring): 12-24. (Summary).