Management And Accounting Web

Horngren, C. T. 1989. Cost and management accounting: Yesterday, and today. Journal of Management Accounting Research (1): 21-32.

Summary by William Beck
Master of Accountancy Program
University of South Florida, Summer 2002

History and Development Main Page

In this article Horngren focused on the changes that have taken place in managerial accounting throughout his career. The article shows the differences in the materials taught, types of research conducted, as well as offering insight into other areas of managerial accounting.

The Changing Focus of Cost Accounting

The primary focus of cost accounting classes in the 1950s was on inventory valuation and income determination and very little focus on management decision-making. 73 percent of the material in textbooks published between 1945 and 1950 covered inventory valuation with only six percent covered management decision making. This focus changed with textbooks published between 1960 and 1970 that had 46 percent of the material covering inventory valuation and management decision making now making up 33 percent of the material covered.

The Changing Focus of Research

In the 1950s the focus of research was mainly on pushing for better practices such as variable costing, responsibility accounting and relevant costs for special decisions. Much of the focus was on which methods were “better or worse” or “right and wrong”. Over time there has been a move away from this “right and wrong” type of analysis. Horngren states the research in agency theory and organizational behavior reinforces the idea that whether one method is better than another depends on managements predictions of how the information will affect the decisions made by there subordinates. Much of the research now focuses on the foundations of managerial accounting itself. Some important questions these studies are raising are as follows: How can we choose an accounting system without understanding the product markets, the production technology and the structure and “culture” of the organization? Horngren also believes the study of production and operations management will lead to an expansion of the understanding of the field of management accounting and its role in an organization.

Horngren uses the following table to illustrate the changes in research further.

1950's-60s 1970s-80s
Single person
Single period
Zero cost of information
Easy access to information
Profit maximization
Tools: For what problems can we use them?
Costly information
Asymmetric information across individuals
Utility Maximization
Problems: What tools should we use?

Cost-Benefit as a Theme for Teaching

The original theme Horngren used for teaching was different costs for different purposes with additional focus on the motivational aspects of budgeting, performance allocation, and cost allocation. Being dissatisfied with this method, “a grab bag of techniques”, Horngren moved to a cost-benefit theme for teaching managerial accounting. Managers must decide which methods will provide the greatest benefits in improved decision making based on the costs associated with each. Horngren believes the challenge for researchers and writers is now to provide guidance as to which system is likely to be the most cost effective given different situations.

Are Accounting Systems Outmoded?

In this section Horngren responds to Kaplan’s assertion that many companies are using cost accounting systems that are not “state of the art”. While he does agree, he does not see it as great of a problem as Kaplan implies. Horngren states that many companies have products in the early stages of their product life cycles. This means the products have high contribution margins, little competition and frequently the company sells all it can produce. Further, engineers are typically in charge in these early stages and have no desire to pay for systems they do not understand. While he agrees as competition enters the market companies may chose to adopt more up to date cost accounting systems, the costs of doing so now outweighs the benefits a new system will provide.

Horngren also responds to the idea that cost accounting text books behind the time. While text books may not include some of the most up to date methodology, Horngren states that textbooks are far ahead of the practices of companies as a whole. Many organizations do not use methods discussed in texts such as multiple overhead rates, discounted cash flow, regression analysis, and flexible budgets because of the costs associated with implementing such systems (..."the cost of keeping the costs").

Multiple Sources of Information

Horngren discusses the other means of control outside of the formal accounting system. Observation or “management by wandering around” can be effective and remains the primary means for planning and control. Horngren mentions that one main danger of this method is that it does not provide for continuity when people change jobs or assist in the learning process for new employees as well as a formal system does. Also a formal system makes it necessary for managers to see bad news as well as good news. This can often be covered up in a less formal or poorly designed system.

Themes for Teaching: Motivation

Motivational aspects are also a key aspect to consider in the choice of a accounting system and it is necessary for managers and accountants to predict how people will behave under different systems. Horngren lists some of the major choices made in designing an accounting system as follows:

1. Choice of a responsibility center. Who is accountable for what?
2. Choice of performance measures.
3. Choice of rewards.
4. Should bonuses be based on accounting numbers? What are the roles of non-monetary compensation?

Horngren refers to the following figure frequently in discussing the design of management accounting systems, commenting that he frequently draws this diagram on the board in classes involving management control systems.

Criteria and Choices for Management Accounting Systems

Goal Congruence

Goal congruence exists when individuals and groups within an organization strive for the goals of top management. This is achieved by designing a system so that managers working in their own perceived best interest are making decisions that are in line with the goals of the organization. An alternative version of this concept is referred to as "behavioral congruence". Since organizations may have difficulty identifying a set of overall organizational goals, the focus is on what types of decisions management wishes its subordinates to make in a given situation and how well the existing or proposed system functions in making subordinates choose the decisions management desires.

Agency Theory and Risk Congruence

Currently, researchers are trying to relate agency theory to the design of management control systems. A superior manager is an example of a principal and a subordinate is and example of an agent. From the stand point of agency theory, the problems of designing control systems can be considered problems of risk congruence, which is the sharing of attitudes towards the organizations risk taking and incentives on the part of superiors and subordinates. The design of the control system should be done so that risks are shared in an optimal way. To change a managers’ behavior, more or less risk should be assigned.


Horngren also focuses on the asymmetric nature of information. It is important for the designer of an information system to ask the following questions:

1. Who has the information?
2. Should others have it?
3. How is it transmitted?
4. How timely is the transmission?

Information in a control system provides assistance in deciding the optimal allocation of resources and in performance evaluations as well.

Reflections on Tomorrow

Horngren believes there is a need to have courses in the future include more descriptions of the methods used by actual companies. This would assist in the testing theories, open new areas of research and also enliven student interest. To maximize the educational value of management accounting, the focus should be on the manager's attitudes and problems (behavioral, economic, quantitative etc.) as well as accounting measurements.


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