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This video explains how Managerial Accounting originated.

PRACTICE EXERCISE

The Industrial Revolution and the rise of factories gave birth to Managerial Accounting. Prior to factories, the various processes involved in creating goods such as clothing were carried out by independent artisans. With factories, these artisans were all gathered under one roof (as “employees”) and paid a wage. This made it difficult to calculate the cost per-unit; for example, how much did it cost to produce one square foot of wool? Managerial Accounting principles were soon developed to calculate the cost per-unit, which also made it easier to calculate the cost of ending inventory for the Balance Sheet and the cost of goods sold for the Income Statement.

Later in the 19th century, the massive scale of railroads led to further developments of Managerial Accounting principles. For example, the large size of railroad companies prompted top management to divide a company into divisions and evaluate the performance of each division. This also led to transfer pricing to coordinate the use of resources between divisions within the same firm. In addition, managers in the railroad industry came up with a number of metrics (e.g., cost per ton-mile) that are still in use today. All of these developments laid the foundation for Managerial Accounting as we know it today.

Practice ExercisesStatus