g., sale of stock, bonds), so did the need for periodic audited financial statements. Management accounting, accordingly, evolved mainly to support these external reporting requirements. Auditors became less interested in the relevance of product cost information for management decisions than for its impact on reported profits. Financial reports were ".too late, too aggregated, and too distorted to be relevant for managers' planning and control decisions." .
As a result, these reports offered little value to operations managers towards reducing costs and improving productivity, failed to provide accurate product costs [i.e., are direct-labor based], and short-term cycle of monthly profit/loss statements required that cash outlays in a given period be expensed in that period [even though their benefits may be long-term]. Short-term profit pressures therefore lead to a decrease in long-term investment.
This book also explores the history of financial and managerial accounting systems, and tries to delineate the pressures that caused the divergence of the two practices. Although "bookkeeping" accounting has been in existence for at least 500 years, modern-day management accounting had its roots in the nineteenth century with the Industrial Revolution, in which economies of scale were achieved in textiles, railroads, and steel. .
Costing standards came into existence at the turn of the century with the advent of Scientific Management techniques, developed by engineers, rather than accountants. Finally, an intricate Return On Investment (ROI) model was developed by the Du Pont brothers in 1903 to support the management of large, diversified organizations. In this model, which is still taught in business schools today, ROI is equal to the return on sales (operating ratio) multiplied by the sales to assets ratio, or stock turn. This ROI model was successfully applied at General Motors in 1920 (when Pierre Du Pont became CEO), to support its decentralized, multidivisional environment.
