(9) Systematic Management: Cost Accounting
- Jon Smart
- Mar 18
- 6 min read
This is the 9th blog post in the Organising for Outcomes series. It is helpful to understand where we’ve come from, how today’s ways of working have evolved, and the context that those ways of working evolved in. This helps us to understand why we’re working the way we’re working and what we might want to change in today’s context, which is significantly different compared to previous technology-led revolutions.
In the previous post we took a closer look at Systematic Management, the introduction of 'systems' (1) for cost transparency, (2) for work and (3) for incentivising workers, instead of managing by Rule of Thumb. Many of the management innovations introduced in the time period from 1870 to 1900 are still in use today, sub-optimally, in a very different context.
In this post we'll take a deeper dive into the first one of three key systems that were developed as part of Systematic Management: cost accounting. The next two posts will take a closer look at production control and wage systems.
Cost Accounting
The most obvious manifestations of cost accounting on ways of working that we’ve inherited from the past and are still evident today in the Age of Digital are a focus on:
Cost over Value
Output over Outcomes
Specifically:
Cost Centres: Predetermined output (aka projects) are funded and are assigned a 'cost centre'. As a symptom of the context in which it evolved, in manufacturing in the late 1800s, the focus by name and psychology is on cost. How much does it cost? How can we reduce costs? Rarely on value, profit, market share, satisfaction, engagement, sustainability and other outcomes. The evolution of the cost centre is based on a context of work which is predictable, repeatable and knowable, which is very different from today’s context.
Information Technology is treated as a cost, rather than as value: More broadly than projects being treated as cost centres, an entire organisational capability, Information Technology, which is necessary to survive and thrive in the Age of Digital and onwards, is treated as a cost centre. In many cases, often in manufacturing or energy companies, Information Technology reports to the Chief Financial Officer, further reinforcing the view of digital as a cost rather than as a value driver and competitive differentiator. This reinforces a separation between IT and "the business," creating an order-giver, order-taker dynamic rooted in outdated industrial-era practices.
Timesheets: the current practice of filling in timesheets with details of the type of work can be traced to this time period, with the introduction of cost accounting.
Let’s take a closer look at how we got to our current ways of working.
How we got here
Leading up to 1870, cost accounting had evolved to support mercantile trading.
The focus was on external transactions and asset valuation, with little attention to internal operations. Overhead costs were not attributed to goods for sale, and financial feedback was slow, making cost estimates unreliable. In manufacturing, firms operated blindly, often mispricing orders. Bidding too high risked losing work, while bidding too low led to losses. As of 1869, estimates within 20% of actual costs were considered accurate.
With falling prices and pressure on profit margin, there was a survival incentive to have improved accuracy and timeliness of costs and to use that information to improve. This was a key focus of the literature in the last three decades of the nineteenth century.
1885, Metcalfe, Philadelphia, USA
Captain Henry Metcalfe’s Cost of Manufacturers and the Administration of Workshops (1885) marked the start of modern cost accounting. As head of workshops at Frankford Arsenal in Pennsylvania (1877–1881), he developed improved administrative methods, later applying them in California and New York. Like other writers of the time, Metcalfe was an engineer who learned by doing and shared his insights.
Interestingly, in 1878, a young Frederick Winslow Taylor began working at Midvale Steel, just six miles from Frankford Arsenal. Their overlapping time and proximity suggests Metcalfe’s innovations may have influenced Taylor’s work.
Metcalfe emphasized that manufacturing success relied on accurate cost estimation, warning that many firms unknowingly sold below cost or persisted in wasteful processes. His solution was a card-based system inspired by library cards, where workers recorded operations, time spent, and customer order numbers. This system served multiple purposes: ensuring accurate wages, tracking labour costs per order, visualizing work in progress, and enabled operational efficiency to be improved.
Metcalfe presented his work at an ASME meeting in Chicago in 1886, where Taylor, who also attended the meeting, acknowledged using a similar system at Midvale Steel. In Shop Management (1903), Taylor later credited Metcalfe’s "complete, well-thought-out invention." Metcalfe’s system provided a foundation for measuring, visualizing, and improving manufacturing processes—focusing on labour time, cost, and output to refine pricing, track orders, and drive continuous improvement.
1887, Garcke and Fells, London, UK
In the UK, Emile Garcke and John Fells published “Factory Accounts, Their Principles and Practices” (1887), pioneering cost accounting alongside Metcalfe. Garcke, manager of Brush Electric Light Corporation Ltd, and Fells, assistant company secretary, tested their methods in the early 1880s.
Like Metcalfe, they advocated time cards and meticulous record-keeping, emphasizing that only systematic records could prevent waste, fraud, and mispricing. They described their work as the first attempt to formalize factory accounting for English readers. In The Making of Scientific Management, Urwick and Brecht (1946) called their publication the most significant event in cost accounting literature.
1896, J. Slater Lewis, Manchester, UK
Joseph Slater Lewis, a British engineer and business manager, founded his own electrical engineering company in 1879, which can trace is lineage to today after many mergers and acquisitions to Prysmian with 33,000 employees in more than 50 countries. In 1896, while General Manager at P. R. Jackson & Co. (still trading today as David Brown Santasalo), he published The Commercial Organisation of Factories, presenting a systematic approach to factory management.
By 1900, Lewis had joined Brush Electric Light Corporation, where Garcke had been managing director, suggesting their likely acquaintance. Lewis emphasized that outdated methods could not support modern industrial complexity, arguing that efficiency and organization were just as critical as profit. He advocated for precise daily records and flexible administrative routines to enable continuous improvement.
As per the following image, which is included as a fold out picture in his book, Lewis presents a comprehensive set of systems, which work together, to connect the internal and external economics, bringing order and insight, enabling improvement:
Diagram of Manufacturing Accounts, Lewis, 1896
His book included over 130 forms and detailed systems to integrate internal and external economics, improving insight and control. He introduced Job Orders, assigning tasks at an individual level, ensuring accurate cost tracking. Urwick and Brecht (1946) later praised his work as a groundbreaking contribution to industrial management.
By the early 20th century, cost accounting had shifted from focusing solely on external transactions to providing detailed internal cost insights, allowing accurate pricing, internal comparison, and continuous improvement.
This is why today, in the context of Information Technology, in most traditional organisations (especially organisations that are not selling Information Technology directly):
product development is a cost centre, rather than a value centre
why there is often more of a focus on cost accounting over throughput accounting (time to value), ironically increasing the hidden costs (work waiting, delaying learning and monetisation, increasing risk, increasing costs)
why there is a focus on output over outcomes
why the word value is rarely used
why "we deliver features not value" is an expression often heard
In the next posts we'll take a deeper dive into (2) production control and (3) wage incentive systems developed as part of Systematic Management, to understand why we work the way we do today and what lessons we can (re)learn from the past to optimise for outcomes today and for the future.
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Also see:
Previous: (8) Systematic Management
Next: (10) Systematic Management: System of Work
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