EVOLUTION OF COST ACCOUNTING

The history of accounting is as old as civilization. It is the process of identifying, measuring, recording and
communicating economic information, capable of being expressed in terms of money. The utility of
accounting information lies in its ability to reduce uncertainty. The information has to be relevant, verifiable,
quantifiable and free from bias.
Prior to the industrial revolution, businesses were small and characterized by simple market exchanges
between individuals and organizations. In those times there was a need of accurate book keeping though not
that much of cost accounting.
However, the industrial revolution in the 18th century brought large sized process industries performing single
activities (e.g. textiles, railways etc.). During this period, there was a lack of market for intermediary products
because of which cost information gained importance as a tool for measuring efficiency of different
processes. But the concept of prime cost was used around 1875 by some Industrialists. The period, 1880 AD
-1925 AD saw the development of complex product designs and the emergence of multi activity diversified
corporations like Du Pont, General Motors etc. It was during this period that scientific management was
developed which led accountants to convert physical standards into cost standard, the latter being used for
variance analysis and control. In 1913 J.L. Nicholson published a book “Cost Accounting Theory and
Practice” from New York.
During World War I and II the social importance of cost accounting grew with the growth of teach country’s
defend expenditure. In the absence of competitive markets for most of the required to fight war, the
Governments in several countries placed cost-plus contracts under which the price to be paid was the cost of
production plus an agreed rate of profit. The reliance on cost information by the parties to defence contracts
continued after World War II as well. Even today, most of the government contracts are decided on a cost
plus basis.