How was cost accounting born: from Wedgwood's pottery to the railways

For a shopkeeper, profit is simple: you bought goods for 10 and sold them for 12, so the profit is 2. But in a business that makes its own items, this calculation does not work. Clay, paint, firewood, the craftsman's labour, the kiln, the warehouse: which part of all this falls on a single bowl? Cost accounting (production accounting) was born from this question.

Who was Josiah Wedgwood?

According to Britannica, Josiah Wedgwood was baptised on 12 July 1730 in the English town of Burslem and died on 3 January 1795 in Etruria. Britannica describes him as a designer and manufacturer distinguished by his scientific approach to pottery.

Wedgwood is famous for his beautiful tableware. For historians of accounting, however, another of his contributions is of interest: he tried to know the exact cost of his products.

What happened in 1772?

In 1970 the economic historian Neil McKendrick published an article devoted specifically to this subject in "The Economic History Review". A Business History Review article that relies on it says:

In 1772 Wedgwood calculated the unit cost of about 31 products, mainly vases, under 14 cost items.

The CPA Australia publication (INTHEBLACK) describes the situation as follows:

in 1772 demand fell and products piled up in the warehouse, and Wedgwood needed to know how far he could cut costs;
the accounts failed to match one another, and this exposed the head clerk's long-running embezzlement.

There are two important lessons here. First: a manufacturer who knows the cost sees which product brings a profit and which brings a loss. Second: if the result of the accounts does not match reality, it is a signal that there is an error or abuse somewhere.

Why did the railways demand a new kind of accounting?

In the 19th century the railways were the largest enterprises of their time. In his 1965 article the business historian Alfred Chandler called the railways pioneers of modern corporate management: they were forced to create new methods to raise and control large amounts of capital, manage an enterprise spread over a wide territory and keep track of thousands of employees.

The peculiarity of a railway is that its fixed costs are very large: rails, bridges, stations and locomotives require money whether the trains run or not. Variable costs (fuel, train crews), on the other hand, change with the volume of freight carried.

Albert Fink and the "ton-mile"

Albert Fink was an engineer who worked on the Louisville and Nashville Railroad. In 2000 the accounting historian J. R. Heier published an article calling Fink's work "the foundations of modern cost management". According to it, Fink tested a system for analysing railway costs in the early 1870s.

Heier writes that Fink's system aimed to measure the profitability and efficiency of railway operations through fixed and variable costs, and his revenue and cost measures for carrying one ton of freight one mile (ton-mile) and carrying one passenger one mile (passenger-mile) became the industry standard.

Then and now

Aspect	The era of Wedgwood and Fink (18th–19th centuries)	Today
Main question	How much does one vase or one ton-mile cost?	The same question, but for thousands of products
Source of data	Handwritten ledgers, workshop accounts	Accounting software, warehouse and production modules
Grouping of costs	Items chosen by the owner himself (14 at Wedgwood's)	Items and accounts set in the accounting policy
Fixed and variable costs	Railwaymen were just beginning to separate them	An ordinary tool of management accounting, break-even analysis
Use of the result	Setting prices, surviving a slump	Prices, product range, budget and control

Today's chart of accounts also has separate accounts for production costs: for example, 2010 "Primary production" and 2510 "General production overhead".

Example: a workshop in Rishton

The "Rishton Naqsh" pottery workshop produces two kinds of products a month: 400 platters and 1 600 bowls (compiled by the author, hypothetical figures). The craftsman Farhod used to divide all costs equally by the number of products and concluded that "one item costs 14 400 soum on average". Now he calculates by cost items, using Wedgwood's method:

Item	Platter (per unit)	Bowl (per unit)
Clay and glaze	9 000	2 500
Decorator's labour	14 000	3 000
Kiln fuel (by space occupied)	6 000	1 500
Workshop rent and other overheads (by working time)	7 000	2 000
Total cost	36 000	9 000

Check: 400 × 36 000 + 1 600 × 9 000 = 14 400 000 + 14 400 000 = 28 800 000 soum; dividing by 2 000 items gives Farhod's original 14 400 soum. The total is correct, but the "average" figure does not show the real cost of any product.

Farhod was selling a platter for 40 000 soum: a profit of only 4 000 soum per unit. A bowl he sold for 14 000 soum: 5 000 soum per unit. The platter, which takes a lot of labour, was actually bringing in less profit. Now he will reconsider the platter's price or simplify the decoration method. Two hundred and fifty years ago Wedgwood was also looking for answers to such questions.

Conclusion

Cost accounting was born together with the Industrial Revolution: Wedgwood broke product costs down into items, and the railwaymen learned to distinguish fixed and variable costs. Both ideas live on today in the accounts of every manufacturing business.