Continuity and change in British cost accounting development: the case of Hawthorn Ieslie, shipbuilders and engineers, 1886–1914

The British Accounting Review 38 (2006) 95–121 www.elsevier.com/locate/bar

Continuity and change in British cost accounting development: the case of Hawthorn Ieslie, shipbuilders and engineers, 1886–1914 Tom McLean * Business School, University of Newcastle, Newcastle Upon Tyne, NE1 7RU, UK Received 24 October 2002; received in revised form 29 September 2005; accepted 3 October 2005

Abstract This article examines the cost accounting system of a British shipbuilding and engineering firm during the late nineteenth, early twentieth centuries. Research findings indicate a high level of continuity in the essential features of the system, with a trend to produce information outside of the accounting ledgers in order to satisfy managerial information requirements. Furthermore, while accounting information provided the basis for much routine decision making and control, it played only a limited role in strategic decision making which was underlain by social and cultural considerations. The current research adds to the body of work of the neoclassical revisionists in building a new conventional wisdom of the development of British cost accounting. q 2005 Elsevier Ltd. All rights reserved. Keywords: Cost accounting; Continuity; Change

1. Introduction The traditional conventional wisdom of the historical development of cost accounting in Great Britain (Edwards, 1937; Solomons, 1952) maintained that very little cost accounting development took place until the ‘costing renaissance’ of the last three decades of the nineteenth century, when the focus of cost accounting shifted from cost recording to cost control. This traditional analysis, based on the historical accounting literature, was

* Tel.: C44 191 222 6558, fax: C44 191 222 8758. E-mail address: [email protected].

0890-8389/$ - see front matter q 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.bar.2005.10.001

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strengthened by Pollard’s (1965) seminal and wide-ranging study of management and accounting practices in Industrial Revolution businesses. Thus the traditional conventional wisdom came to hold that ‘until the twentieth century accounting data (were) not widely used as a direct aid to industrial decision making’ Chatfield, 1977, p.105). Furthermore this conventional wisdom maintained that ‘even at the turn of the (twentieth) century anything that could be called a costing system was still to be found only exceptionally both in British and American industry’ (Solomons, 1952, p.17), and indicated that until ‘the twentieth century most cost records were developed independently and not tied directly to the double entry accounts’ Chatfield, 1977, p.102). After holding sway for much of the twentieth century, this traditional neoclassical analysis has been challenged not only by critical accounting historians working within Marxist/labour process and Foucauldian paradigms (Fleischman and Radcliffe, 2005), but also by a ‘new conventional wisdom’ (Boyns and Edwards, 1997a, p. 2) built on the groundwork of neoclassical revisionist accounting historians (e.g., Boyns, 1993; Boyns and Edwards, 1995, 1997a, 1997b; Edwards, 1995; Fleischman and Parker, 1990; 1991). Unlike the traditional neoclassical analysis, the new conventional wisdom is based on detailed archival research and indicates, inter alia, that the integration of cost and financial accounts, the use of accounting information for managerial decision making and the operation of sophisticated costing systems all pre-date the twentieth century. Given that the new conventional wisdom is a relatively recent formation, there have been many comments on our present limited knowledge and calls for more archive-based research to be undertaken in order to enhance our understanding of British cost accounting development (e.g., Boyns and Edwards, 1995; Fleischman and Tyson, 2000; Fleming et al., 2000; McKinstry, 1999). The current research augments the new conventional wisdom by presenting an archive-based case analysis of Hawthorn Leslie, a British shipbuilding and engineering firm, during the period 1886–1914, thus extending our scant knowledge of cost accounting in this industry (Fleming et al., 2000; Hirabashi, 1991; McLean, 1995; 1996). The remainder of the current paper is organised into five major sections: first, the cost accounting context is examined and research propositions developed; second, contextual information is presented on the firm of Hawthorn Leslie; third, the firm’s accounting and costing systems are examined and analysed; fourth, developments in managerial information in the firm are scrutinized; fifth, the summary and conclusions are presented.

2. Cost accounting context and research propositions In this section the cost accounting context is examined in terms of the integration of financial and costing records, and continuity and change in systems and the provision of managerial information; finally, research propositions are developed. The traditional conventional wisdom of the development of cost accounting indicates that financial accounting and cost accounting were originally two distinct systems but were brought together into one integrated system during the late nineteenth—early twentieth century (Locke, 1979; Solomons, 1952; Wells, 1977). However research into the coal, iron and steel industries has enabled Boyns and Edwards (1997a, p. 10) to provide

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‘clear evidence. of the widespread integration of cost and financial accounting systems. prior to the so-called costing renaissance of the 1870s’. This evidence indicates a ‘dramatic inconsistency’ (Boyns and Edwards (1997a, p. 11)) between the traditional conventional wisdom and historical practice. Further evidence of this dramatic inconsistency is provided by the comments of the chartered accountant, Thomas Plumpton (1895, pp. 758/773) in a lecture on ‘Manufacturing costs as applied to shipbuilding’ delivered to the Manchester Chartered Accountants Students’ Society. Plumpton noted that in the 1860s he had trained in a large engineering company ‘where the Cost Accounts were so interwoven with the Commercial Accounts as to form an integral part of the whole. system.’ Although this system was ‘until recent years so universally adopted’, Plumpton no longer recommended or used it in the 1890s and commented that: I cannot adopt any system of Cost Accounts that would. cause an affiliated connection with the trading accounts, although other gentlemen in our profession do advocate the interweaving of the Cost Books with the Trading Books; and for the purpose of argument I will admit that my first experience some 30 years ago was on that principle. Hence, it is apparent that Plumpton did experience, discuss and advocate a shift from integrated to separate cost and financial accounts. Furthermore, Plumpton’s comments did find some resonance in the contemporary literature, both of the shipbuilding and engineering industry and of the accounting profession. F.G. Burton, an Associate of the Society of Accountants and Auditors, and a former Secretary and General Manager of the Milford Haven Shipbuilders & Engineering Company Limited described, and recommended, (Burton, 1900; 1911) systems he had used in practice and which were based on the separation of cost and financial accounts. This practice was also prescribed in 1916 by the Clydeside Shipbuilder, Col. John M. Denny in a presentation to the North East Coast Institution of Engineers and Shipbuilders (Transactions, Vol. 33, p.155). As a variation, Bruce (1911, pp.78–79)recommended that, in the shipbuilding and marine engineering industry, job costs should be memorandum records extracted from the financial accounting system. This industry— specific literature was re-enforced by the view of the editors of the The Accountant who, in 1894, made known that, in general, they ‘favoured keeping the cost accounts and the financial books separate’ (Boyns, 1993, p.329). This evidence from the literature is reinforced by archival research into contract accounting and costing in the Sunderland shipbuilding industry during the period 1818– 1917 which concluded (McLean, 1995, pl.42) that: Although systems designs varied between firms and over time, the available evidence suggests that systems development in Sunderland followed a pattern broadly similar to that found in other shipbuilding districts, as evidenced by the contemporary literature. This pattern shows an evolution from systems based on integrated accounting, through to the production of memorandum cost data and to systems of contract accounting and costing incorporating financial and cost accounting sub-systems.

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As to why the change from integrated to separate cost and financial accounts took place, Boyns and Edwards (1997a, p. 20) themselves may provide some indication from the coal, iron and steel industries when they note: There is some evidence to suggest that most information requirements may have been met, until around the middle of the nineteenth century, by examining the contents of the ledgers. After about that time, the growth in the size of companies together with rising information requirements appear to have been responsible for the production of costing data outside the financial ledgers, typified by the increasing use of cost sheets written up in either separate books or in loose-leaf form. Following this innovation, we find. the financial ledger far less cluttered but also far less informative than was previously the case. This analysis corresponds with McLean’s (1995, p. 142) comment that in the Sunderland shipbuilding industry of the nineteenth century, a major factor in the shift from integrated to separate cost and financial accounts was ‘the need for more extensive cost analysis in order to provide information for pricing decisions in a competitive environment during a period of technological and organisational change’. Nevertheless it must be recognised that in the Sunderland shipbuilding industry systems evolved slowly over the period researched, 1818–1917 (McLean, 1995); similarly there was a slow evolution of systems in the coal, iron and steel industries, also over long time periods, through until the end of the nineteenth century (Boyns and Edwards, 1997a; Edwards, 1995), and in U.K. industry in the first two decades of the twentieth century (Fleischman and Tyson, 2000). These findings, together with other research (e.g., Boyns and Edwards, 1997b), indicate that a basic feature of British cost accounting was that it exhibited continuity together with adaptation to meet changing management information requirements. However, in shipbuilding and related engineering firms, responses to perceived information needs were conditioned by the nature of this capital goods industry which was subject to violent fluctuations in output (Pollard and Robertson, 1979, pp. 252–253). Owner-managers sought to deal with this problem, in part, by avoiding fixed costs, and particularly fixed administrative costs, developing ‘an almost instinctive dislike for the extra burden of white-collar salaries implied by more. systematic costing’ (Reid, 1991, p. 47). Nevertheless, costing systems were required and, in presenting a paper on ‘financial organisation’ during a 1916 debate at the North East Coast Institution for Engineers and Shipbuilders, the Vice President of the Institution, Edwin L. Orde, outlined (Transactions, Vol. 33, p. 51) his view of the objectives and design of costing systems, and the constraints under which they were employed: The primary object of all costing systems is to obtain a record of the amount of money spent on labour and material, (and) to ascertain the proportion of. expense. to be added to these two items and to present [1] The total net cost of every production, and, [2] Such divisions and sub-divisions of the cost as may be considered by the management most likely to enable a close scrutiny of working processes to be made, and a continuous comparison with corresponding items in the estimates.

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Four essentials of a good costing system are:1. 2. 3. 4.

Accuracy Simplicity Rapidity Elasticity.

This seems obvious, but. there is a danger that elaboration of detail is only too apt to increase to a point where the cost of working the system becomes too high. Thus in the current research dealing with the development of cost accounting in the British shipbuilding and engineering firm of Hawthorn Leslie for the period 1886–1914, several propositions are to be investigated. First, that systems would exhibit a high level of continuity. Second, that since stringent, if informal and unspecified, cost-benefit criteria existed, perceived management needs for more and better information would be subject to careful scrutiny and, if deemed reasonable, would be met be adaptations and reconfigurations of existing systems and data rather that by newly specified systems. Third, although the traditional conventional wisdom of cost accounting indicates that financial and cost accounting were originally two separate systems combined into one integrated system during the late nineteenth–early twentieth century, the current research follows Boyns and Edwards’ (1997a) by investigating the proposition that systems development was in fact in the opposite direction, from integrated to separate systems. These propositions are examined in following sections of this paper, but first some background information is provided on the firm of Hawthorn Leslie.

3. The firm The firm of R & W Hawthorn Leslie and Co. Ltd was incorporated in 1886 as a result of a merger between the engineering firm of R & W Hawthorn and the shipbuilding firm of Andrew Leslie. R & W Hawthorn had been founded in 1817, but eventually the Hawthorn family sold its interest in the business and by 1876 the firm was owned by four equal partners, B.C. Browne, F.C. Marshall, C.B. Straker, and J.H. Ridley. In 1882, W. Cross joined the partnership, buying one-quarter of Browne’s share. Andrew Leslie set up his shipyard in 1853 and was joined in partnership by Arthur Coote in 1864. Coote married Leslie’s daughter and by 1885 owned and managed the shipyard. The merged firm of Hawthorn Leslie was a limited company with over 70 per cent of its shares being owned by the six founding directors, the former partners and owners of the separate firms (Table 1). Taking into account their previous service with their separate firms, these men, with the exception of Cross, spent extremely long periods of time with the company, as did several other key figures (Table 2), giving great continuity in senior management. Four major activities were undertaken by Hawthorn Leslie in three departments, all on the River Tyne in the north–east of England: shipbuilding at the Hebburn yard; marine engine and boiler construction at the St. Peter’s Works; and locomotive building at the Forth Banks Works; the two works being sited in different areas of Newcastle upon Tyne.

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Table 1 Directors’ shareholding in Hawthorn Leslie (1889) Number of shares B.C. Browne A. Coote F.C. Marshall C.E. Straker J.H. Ridley W. Cross Total directors’ Balance held by non-directors, in small blocks, 1–130 shares: Total shares issued: Nominal value per share:

430 1270 571 571 571 142 3555 1401 4956 £100

Source: TWAS 962/53, p. 105.

Hawthorn Leslie is regarded as one of Britain’s ‘important shipbuilders’ (Pollard and Robertson, 1979, p. 51) of the period, employing over 2,500 shipyard workers in a busy year, and was at the forefront of the technical innovation required to meet changing market demands for specialised vessels such as oil tankers, refrigerated ships and warships (Clarke, n.d., pp. 50–52; p. 67). However, the nature of the industry meant that shipyard activity and profits could fluctuate dramatically (Table 3). The St. Peter’s Works’ output of engine horse-power made it one of the largest engine works in the country. In the 1880s the Works produced triple expansion engines and also manufactured Scotch fire-tube boilers, but thereafter its product line changed radically as it acquired licences to manufacture new designs of boiler in 1894 and of engine in 1905 (Clarke, n.d., pp. 52–54; p. 69). Employment remained relatively steady at c.500 men (Clarke, n.d., p. 73). The Forth Banks Works experienced a difficult period through until 1900 as output averaged only 17 locomotives per year, given the low demand of British railway companies (Clarke, n.d., p. 55). However, after 1900 there was a rising trend of output, reaching over 50 locomotives in 1914. Strains on production capacity at the Engine Works meant that throughout the early 1900s increasing amounts of boiler and engine work were undertaken by Forth Banks Locomotive Works, accounting for about half of its wages bill by 1914, the labour force having risen from c.500 men in the early 1900s to 925 men in 1914 (Clarke, n.d., p. 71). The company’s profit and loss system records the period 1886–1897 as one of Table 2 Senior management Sir B.C. Browne F.C. Marshall J.H. Ridley C.E. Straker A. Coote W. Cross Sir H. Rowell C.W. Bigge Source: Clarke, n.d.

1870–1916 1870–1899 1871–1904 1876–1933 1864–1906 1886–1895 1891–1922 1895–1916

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Table 3 Departmental profits (and losses) 1886–1897 Year

St Peters engine works (£)

Forth banks locomotive works (£)

Hebburn shipyard (£)

1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914

50,741 17,899 2322 9071 29,838 16,084 16,425 19,386 11,692 20,312 9685 20,947 22,016 16,820 15,373 18,729 21,363 46,709 79,039 85,476 95,359 58,227 30,190 16,814 27,104 47,831 35,113 43,523 27,258

5381 4247 5323 7068 6474 8142 3687 6849 5911 11,371 3446 206 3413 3940 9091 9084 9872 2676 2617 1023 2395 9452 9043 7784 8106 7074 8450 9742 20,764

2631 290 12,130 7156 5496 5640 2306 3384 5826 6729 18,021 15,626 6314 2630 2733 4394 8640 7794 17,113 15,979 9400 22,245 1982 10,533 1564 42,805 30,019 40,039 51,500

Source: TWAS 962/85/86/87.

almost constant profitability for St. Peter’s, although the results presented for the shipyard and Forth Banks were much poorer and much more variable (Table 3); after this period, each department reported profits through until 1914. Thus, Hawthorn Leslie provides a significant research site in an industry sector that is at present subject to relatively little examination by accounting historians. The current research is based on the company’s archive, held by the Tyne Wear Archive Service (TWAS).

4. Contract accounting and costing systems Although the Hawthorn Leslie merger was initiated by Leslie’s shipyard, the Head Office of the newly merged company was located in the former Hawthorn headquarters at St. Peter’s Works, and the Chairman and the Company Secretary of the newly-formed company were former Hawthorns’ partners. From at least 1871 Hawthorns’ had operated

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a contract accounting system that enabled the production of separate annual profit and loss accounts for its Engine Works and Locomotive Works, together with a total profit and loss account and balance sheet for the firm. On the merger in 1886, this system was simply extended to include the shipyard and, in basic form, remained essentially unchanged through until 1914 (TWAS 962/83–86). Similarly, the form of the contract costing system of the Shipyard, Engine Works and Locomotive Works also remained essentially unaffected by the merger and stayed constant through to 1914 (e.g., TWAS 962/376). Accounting ledgers have not survived in the archive and, therefore, a detailed reconstruction of the accounting system cannot be undertaken. However, examination of the surviving documentation does make it apparent that before the merger contract costs were prepared as memorandum records outside of the double-entry accounting system that produced the profit and loss accounts and balance sheets and continued to be prepared in this through until 1914 (see e.g. Table 4). Amongst the industry and accounting literature recommending the use of nonintegrated systems, the type of system employed on Tyneside by Hawthorn Leslie was specifically and independently advocated by Bruce (1911) who detailed (pp. 78–79) the method of operation applied in his Clydeside firm: The Works Journal: The Works Journal, into which all the materials and wages have been posted, is of quite a simple form. In the first column the total value of all material supplied by each shop, the total of the month’s invoices, and the total wages on all the contracts are entered. These combined totals are allocated to the individual contracts on hand and extended to separate columns ruled off for the purpose. When the journal has been completed, the total shown under any contract is the actual net amount spent on that contract for the month. Loose sheets embodying the information in each monthly return are filled up and given to the manager and estimator for their information. The works journal then goes to the accountant of the firm for posting into the ledger. The Finished Cost Book: It is now (necessary) to make a record of the various items which go to make up the total against any given contract. This entails. going through the invoice guard book, the material sheets, and the wages summary book, picking out the different materials etc. and entering them into a finished cost book suitably rules and printed. These finished costs are then abstracted from the cost book on to loose printed sheets for the ready reference of the estimating department. Thus the use of this method enabled further inputs to the accounting system, and also provided information for estimating and other managerial purposes. Ultimately, the accounting system enabled the production of contract costs and annual profit and loss accounts for each of the company’s three ‘departments’ (e.g., Table 5). Apart from slight improvements in presentation, the format of these remained constant through to 1914. In order to assess key areas of accounting practice and policy, and to identify areas of continuity and change, the following contentious factors in relation to profit and loss account construction are next examined in turn: surpluses on stock; transfer pricing; overhead costing; depreciation; profit on work in progress; managerial information.

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Table 4 Hawthorn Leslie, ship cost analysis Screw steamer: ‘Perthshire’ No. 315 Ship: built 1893 420 ft!54 ft!28.85 ft Tonnage: Gross: 5549.94 Net: 3622.51 £ s. d. Steel plates 5 2 3 Per ton Steel bars 4 19 5 Per ton Iron plates 4 19 8 Per ton Iron bars 5 7 8 Per ton Liners 4 14 10 Per ton Iron work 3 0 11 Per ton Wages abstract Time Ironwork Platers Boilersmiths Angle and ironsmiths Rivetters Caulkers Drillers Drillers Smithwork Blacksmiths Woodwork Carpenters Joiners Patternmakers Sawyers Polishers Sundries Boatbuilders Sparmaker Fitters Brass finishers Blockmakers Riggers Plumbers Painters Cementers Labourers Foremen @ 7%a

Piece

403 42 12

0 15 19

1 11 2

407 243 44

17 5 10 13

1 3 7 3

102

16

5

1744 560 55 40

1 8 7 3

10 1 9 1

3490

18

9

122

14

732

1 4 1 14 16 17 3 16 9 17 1

5 7 3 6 9 11 8 2 2 7 6

Summary

6

3893 42 135

18 15 13

10 11 8

6

2

3692 975

16 11

5 5

823

15

1

868

18

11

9609

15

2

677

13

3

780

9

8

780

9

8

4

1744 560 55 40 66

1 8 7 3 4

10 1 9 1 4

2466

5

1

18 40 308 59 12 48 144 519 51 550

1 4 1 14 16 7 3 16 9 17

5 7 3 6 9 11 8 2 2 2

1753 14,610 1022 £15,632

12 2 14 16

7 6 4 10

66 18 40 308 59 12 46 144 519 51 393 5253

Total

4

1

10

0

156 9357

19 1

7 0

Source: TWAS 962/376. a Other analyses of ships costs refer to ‘yard charges @ 7%’ Explanatory note: At the head of the page, the physical dimensions of the ship are given. Next memorandum data indicating materials costs per ton for the ship are shown; these data are extracted from material cost analyses for the ship (TWAS 962/376). Finally, the wages abstract for the ship is presented, analysing wages by trade and according to whether they were paid on a timework basis or a piece-work basis.

To:

By:

Works charges Balance unabsorbed

7672

1

Profit on ships Profit on repairs

26,605 3353

11 3

11 5

Dock refits

Insurance: Fire Accident

500 1000

0 0

0 0

5578

15

1

2933

4

7

798 1265

10 16

10 4

1448 3147 32 116 400

14 5 15 17 0

4 2 8 10 0

1500

0

0

Bad debts Depreciation Leasehold land 1/58 Leasehold buildings1/58 Dock Fixed plant and m/ cery 5% Office furniture 5% Boats, launches, etc 5%

11

791 933

0 0

0 0

652 3241

0 0

0 10

75 356

4 18

6 7

29,958

15

4

1807

0

6

3921

1

9

7893 4224

19 17

8 7

Profit on departments

10,576

6

Forgings

1799

13

Smiths shop Ferry Galvanising

385 126 1693 4005 84

0 13 16 3 2

7 7 7 9 0

2046 890 3119

17 15 15

1 10 2

616

14

4

1219

17

3

10

6645

13

0

827

18

6

Less haulage Surplus on stock Stores: General Rivets Timber Iron and steel Scrap Discounts

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General charges Salaries and commissions Rent and rates

Repairs Buildings Machinery Galvanising Office furniture Renewal of roofs Dredging For year: Written off:

104

Table 5 Hawthorn Leslie, shipyard profit and loss account, 1905: Profit and loss account of the Hebburn shipbuilding yard for the year ending 30 June 1905

Goodwill, part £1100 Less redemption fund Balance to general profit and loss account

500

0

0

555 6604 6104 15,979

0 3 3 1

0 11 11 6

47,805

14

10

47,805

14

10

Source: TWAS 962/86.

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4.1. Surpluses on stock Substantial surpluses on stock were shown in the departmental profit and loss accounts (e.g., Table 5), indicating that Hawthorn Leslie followed the common industry practice (Transactions, Vol. 17, p. 136) of inflating materials issues: ‘it is advisable. to add a small percentage to the weight. so. to leave the actual stock when taken in excess of the amount shown in the books, and the amount of the excess appearing at the end of the financial year can then easily be credited to the various jobs in hand during the period. The advantage of this is that all current costs are, if anything, slightly full’. Hawthorn Leslie used this method throughout the research period, but made the year-end adjustments to the profit and loss account rather than to the individual contract. Hawthorn Leslie’s method generally ensured that a conservative view was taken on the costs and profits of individual contracts, and that ‘slightly full’ costs provided the basis for cost estimation. However, as investigated later in the current research, this accounting practice did lead to difficulties when managers tried to compare estimated and reported contract costs. 4.2. Transfer pricing Boyns and Edwards (1997a, p. 20) have noted that there was a widespread use of systems of transfer pricing in the coal, iron and steel industries of the second half of the nineteenth century. Their research indicated (Boyns and Edwards (1997a, p. 21)) that transfer pricing systems based on accounting prices and market values, enabling the assessment of departmental profitability, were used more widely than were systems based on cost, the latter systems enabling internal control. However, Boyns and Edwards (Boyns and Edwards (1997a, p. 18)) also note the example of a firm that chose to use transfer prices based on cost when all of the department’s output was transferred internally, but employed transfer prices based on accounting prices for departments that interfaced with the external market. In a paper presented to the North East Cost Institution of Engineers and Shipbuilders in 1899, W.E. Cowens indicated (Transactions, Vol. 15, p. 222) the application of transfer prices in this particular industry: while touching upon inter-departmental costs, it is the rule generally to treat another department in the same way that you would treat an outside customer. obtain prices. (which) must be adhered to even if it results in a loss to the department. Thus, this practice regarded each organisational sub-unit as a separate profit reporting entity, a feature of British nineteenth century ‘atomistic economic organisation’ (Elbaum and Lazonick, 1987, p. 15). Prior to the Hawthorn Leslie merger, the firm of R & W Hawthorn had sought a dis-aggregated form of organisation when, in 1884, ‘it was decided to separate the activities of Forth Banks and St. Peter’s, so that they were worked as virtually separate businesses’ (Clarke, n.d., p. 27). Each of the two departments had its own profit and loss account; within each department, in addition to the main activities of engines/boilers or locomotives, there were sub-departments which were profit and loss reporting entities. The post-merger profit and loss accounts (e.g., Table 5) were a continuation of this accounting system. Although detailed accounting records do not exist for the subdepartments, the company historian (Clarke, n.d.) suggests that these sub-departments

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provided internal transfers only. Although the bases of calculation cannot be verified, the practice of sub-departmental profit and loss reporting continued throughout the research period indicating that transfers were based on accounting prices or market values. The wave of mergers between engineering and shipbuilding firms in the 1880s was the result, in large part, of a desire to achieve the industrial integration of these activities (Pollard and Robertson, 1979, pp. 89–90). In Hawthorn Leslie, substantial integration did take place after the merger. For example, in the pre-merger years, 1854–1885, Hawthorns’ engined only 49 of Leslie’s 254 ships (Clarke, n.d., pp. 46–47), whereas in the immediate post-merger period 1886–1897 St. Peter’s engined 69 of the 95 ships constructed in the shipyard (Clarke, n.d., p. 111). Although it is apparent that transfer prices were adhered to once set (e.g., TWAS 962/42) the level at which prices were set is less clear. In the absence of any specific policy statements in the extant archive, the current investigation must rely on the surviving documentation relating to specific contracts. Transfer pricing systems in Hawthorn Leslie may be examined by considering the Engine Works, which supplied both the external market and the Hebburn shipyard. When a ship was build by Hebburn, St. Peter’s Engine Works involvement could take one of two forms. In the first form, St. Peter’s had a direct contractual relationship with the ultimate client, the ship owner, and naturally accounted for products transferred at the market price stated in the contract (e.g., TWAS 962/374/2121). In the second form, St. Peter’s had no contractual relationship with the client; the total contract price was agreed between the Hebburn shipyard and the client, and then the split of that price was ‘arranged’ between the two departments. Because of the different technical specifications of the products, it is difficult to make precise comparisons between these ‘arranged’ prices and market prices charged to clients by St. Peter’s, although similarities may be observed (e.g., Table 6). Thus, it cannot be stated unequivocally whether transfer prices were based on accounting prices or market values. However, Hawthorn Leslie’s lack of clerical staff (Clarke, n.d., p. 55) and its organisational structure and contractual arrangements suggest that the system would not have been over elaborate and may have been based on market prices. 4.3. Overheads Although there was a long history of overhead cost analysis in Great Britain (e.g., Stone, 1973), the accounting literature (Solomons, 1952) and archival research (Boyns and Table 6 Examples of transfer prices and market prices of St Peter’s Marine Engines Date:

Engine number

Engine description

‘Arranged’ price (£)

1885 1886 1891 1892 1892

2050 2069 N/A 2257 2258

26!41!70 (!45) 26!41!70 (!45) 24!39!64 (!42) 231⁄2 !39!64 (!42) 23!38!62 (!42)

11,000

Source: TWAS 962/374.

Market price (£) 10,950 8300

8500 8050

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Edwards, 1997a) reveal that by the late nineteenth century there was a growing concern in British industry with the apportionment of overhead costs to products. Practice (McLean, 1995) and literature (Plumpton, 1895, p. 775; Transactions, Vol. 33, pp. 56–58) of the engineering and shipbuilding industry indicate that, if possible, expenses were charged directly to particular contracts. Archive research (McLean, 1995) in shipbuilding reveals that up to the 1870s overhead costs were not charged to ships, but were written off to the profit and loss account. However, the increasing importance of overhead costs in the late nineteenth century led to discussions in the engineering and shipbuilding-related literature (Bruce, 1911; Burton, 1900; 1911; Transactions, Vols., 15,17,18) of methods of charging out overheads to contracts, including rates based on price, cost and labour and machine time. The archive evidence (McLean, 1995) indicates the use of long-term rather than annual overhead rates, and B.C. Browne, the Chairman of Hawthorn Leslie, stated (Transactions, Vol. 33, pp. 156–157) that Charges should be taken over a number of years, not less than five. They would find that taking an average of five years, it came out pretty accurately. One year, of course, differed very much from others according to the amount of work in hand. With a full year, one made a profit on one’s charges, as one ought to do, with an empty year one lost on one’s charges, but the result over five years was, as a rule, quite satisfactory. Although there are no surviving internal policy statements or calculations regarding overhead rates in the Hawthorn Leslie archive, it is apparent that through until at least 1914, the firm did indeed employ long-term rates in each of its departments, writing-off over or under- absorptions to the annual profit and loss accounts. However the firm did not change its overhead rates over the 5 year cycle suggested above, but employed them for much longer period of time. In the shipyard, for example, ‘yard charges’ were made at 7% of prime cost throughout the extant Cost Book series (TWAS 962), covering the period 1886–1900, writing-off annual over- or under-absorptions to the year’s profit and loss account; for example, in 1905 an under-absorption of £7,672.11.1 was written off (Table 5). It is clear that, during the research period, there was a continuity in Hawthorn Leslie’s overhead costing, with little accounting change. The overhead rates employed related only to production-based departmental overheads. General departmental overheads were written off directly to the departmental profit and loss accounts and general company overheads were written off to the company profit and loss account, thereby precluding any mis-apportionment of overhead costs. General overheads increased substantially between 1886–1914, for example head office salaries were £6,368 in 1886 and £30,694 in 1914, (TWAS 962/85–86) but the Hawthorn Leslie overhead costing system remained essentially unchanged. 4.4. Depreciation In the latter part of the nineteenth century company directors still exercised considerable discretion in the area of capital accounting and depreciation (Boyce, 1992, p. 52 Edwards, 1989, p. 21). Pollard and Robertson (1979, pp. 79–80) argue that in shipbuilding ‘depreciation policies were frequently arbitrary’.

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In his 1898 Presidential address to the North East Coast Institution of Engineers and Shipbuilders, B.C. Browne, the Chairman of Hawthorn Leslie, expressed his views on capital accounting and depreciation. As a businessman, he understood the potential of accounting policy to affect profits, dividends and share prices but he stated unequivocally (Transactions, Vol. 15, pp. 231–232) that consistency in accounting policy was required: as regards depreciation it was quite clear that people ought, whether they made or lost money, to charge an absolute fixed rate of depreciation—so much on machinery, so much on buildings. Hawthorn Leslie had in fact followed this method since 1886, using Hawthorn’s preincorporation policy of differential depreciation rates for different classes of fixed asset (TWAS 962/85). These rates were, updated (TWAS 962/42/367) in 1903 during a period of heavy capital expenditure. In his Presidential address of 1898, Browne further noted (Transactions, Vol. 15, pp. 231–232) that; it was a good plan, every ten or twelve years if possible, to have the works re-valued by an independent outsider as a sort of check to see if they were keeping up a fair figure as the value of their works. Hawthorn Leslie made just such a revaluation in 1904 (TWAS 962/85–86) and used this to record fixed assets in the balance sheet at a revalued ‘fair figure’ rather than a figure based on historical cost. Throughout the research period, Hawthorn Leslie followed and updated distinct accounting policies in the area of capital accounting and depreciation, and made great play of the virtues of this when seeking to raise external finance (TWAS 962/85). 4.5. Profit on work in progress Hawthorne Leslie was engaged in the construction of large-scale capital products. Since the construction period on these products often over-lapped different financial years, the firm was faced with the problem of when to recognise profit on contracts. The Accountant (1897, p. 329) advised caution in taking profits on work in progress in contract industries. With regard to engineering and shipbuilding, one writer (Burton, 1911, p. 36) noted that clients often made progress payments during construction and this facilitated a reasonably accurate calculation of profit on work in progress. However, archive research (McLean, 1995, pp. 141–142) indicates that practice varied in the shipbuilding industry of north–east England during the late nineteenth—early twentieth century: some firms took profit on work in progress whilst others took profit only on completion. The evidence for Hawthorn Leslie’s policy in respect of the apportionment of contract profits is limited. The terminology and format of the final accounts (TWAS 962/231) indicate that during the period 1886–1921 the firm’s practice was to take profit only on completion of contracts. However, working schedules (TWAS 962/231) prepared in 1921 calculate the ‘adjustment of capital consequent on apportionment of Profits on Contracts.’ The calculations cover the period 1912–1921 and confirm a change of accounting policy in 1921 from taking profit only on completion to taking profit on work in progress, although explanations for the change in policy are not available in the surviving archive.

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4.6. Managerial information Annual profit and loss accounts provided an overview of departmental financial performance. However, in this contract industry the focus of managerial attention was not simply the department but also the contract: each individual ship, engine, boiler and locomotive. Contract costing systems had been in place prior to the Hawthorn Leslie merger in 1886 and remained essentially unchanged through to 1914. Hawthorn Leslie used contract costs as feed-forward information in price estimating decisions (TWAS 962/35), but in shipbuilding and engineering it was also necessary to make comparisons of estimated and actual costs of contracts in progress in order to keep management in touch with the financial aspects of operations (Transactions, Vol. 33, p. 55) . Although complete ‘progress cost books’ are not available in the extant Hawthorn Leslie archive, other company documents (TWAS 962/119) do refer to them. It is not possible to state if these progress cost books were in continuous use in Hawthorn Leslie throughout the research period or were an innovation during it. However, it is known that these records were not unique to Hawthorn Leslie, but were commonplace throughout the regional (Transactions, Vol. 33) and national (Pollard and Robertson, 1979) industry of the period. It is apparent that the Board of Directors did use the contract costing systems to monitor the work of the various heads of departments and to hold them accountable. The two most significant examples of this related to men who were both Directors and Heads of Department: Coote of the Hebburn Shipyard and Cross of the Forth Banks Locomotive Works. In 1888, Coote was obliged to accept personal responsibility for losses incurred on oil tanker contracts and repaid £12,029 to the company (TWAS 962/53/113). In 1895, Cross was dismissed after incurring a series of losses on contracts. He had argued (Clarke, n.d., p. 56) the problems lay not only in low market prices but also in the company’s price estimating process which suffered from a lack of reliable cost estimates due to staff shortages. However, Cross was finally dismissed in 1895 after incurring costs of £27,111 on a contract he had accepted from Ceylon Railways at a contract price of £18,716 (Clarke, n.d., p. 56). Thus the contract costing system was employed in providing the financial information on which the dismissal decision was based. This contract costing system was, in essence, unchanged since prior to the merger of 1886. This section has examined Hawthorn Leslie’s contract accounting and costing systems, focusing on key areas of accounting policy and practice and continuity and change in contentious areas of profit and loss account construction: surpluses on stock; transfer pricing; depreciation; profit on work in progress; managerial information. The following section examines developments in managerial information that took place outside of the contract accounting and costing system.

5. Developments in managerial information Developments in managerial information took place in Hawthorn Leslie in two major forms: first, the instigation of Reports for Directors’ Meetings; second, the institution of capital expenditure reporting. Each of these developments is now examined in turn.

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5.1. Reports for directors’ meetings In the iron and coal industry of the late nineteenth century, it was common for senior management to prepare monthly reports for the Board of Directors (Edwards, 1995, p. 30). However, there are few such surviving records for the north–east England Shipbuilding industry of the period (McLean, 1996, p. 127). This may be because physically ephemeral records have failed to survive; an alternative explanation is that informal reporting systems were used in the environment of this ‘family industry, into which little outside capital or outside influence was allowed to penetrate’ (Pollard and Robertson, 1979, p. 2). However, Hawthorn Leslie was not a family business and did choose to institute formal Reports for Directors’ Meetings subsequent to the massive losses on the Ceylon Railways contracts (see above) and significant changes in senior personnel. In 1895, the head of Forth Banks was dismissed and his role was taken over by one of the Directors; also in 1895, the Company Secretary stepped down and was replaced in that function by a new man. Coote had relinquished his place as head of the Hebburn shipyard in 1892, and his replacement was further promoted to a directorship in 1896. Also in 1896, a local business man was appointed as a non-executive director of Hawthorn Leslie. In 1897, the head of St. Peter’s retired from that position although he continued as company director. Against this background of changing personalities a major development in managerial information took place in 1897 when ‘Reports for Directors’ Meetings’ (TWAS 962/42) were instituted, perhaps as a formalisation of previously informal methods of reporting. These reports survive in the archive in large, leather-bound volumes. At each Board meeting, Reports were presented by the three heads of department and, at times, by Head Office management, and were discussed by the full Board. Reports for St. Peter’s Engine Works and Forth Banks Locomotive Works were generally prepared in Hawthorn Leslie’s Counting House, but the head of department usually prepared Reports for the Hebburn Shipyard. Thus although a company-wide system was instituted, it was by no means a standardised system; the format and contents of each Report were determined on an ad hoc basis to analyse issues of current concern. Aside from relatively straightforward operational matters, the focus of the Reports was generally on two issues: monitoring and control, and capital expenditure decisions. However, important strategic issues were also examined in the Reports. These three areas of Directors’ Reports are next examined in turn. 5.1.1. Monitoring and Control Each month, each head of department reported on work in progress. The Reports for the St. Peter’s Engine Works and Forth Banks Locomotive Works tended to be couched in financial terms, perhaps revealing the influence of the Counting House staff who prepared them. However, the head of the Hebburn Shipyard always reported on work in progress in physical terms. For example, in March 1901, he noted (TWAS 962/42/150–1) No. 382 S/S. Keel laid, doubling fitted and centre through erected, bottom frames set, floors half punched and being riveted, frame and reverse legs being set. Stern frame all forged, being smithed.

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When contracts were completed, heads of departments routinely presented to the Board comparisons of estimated and actual cost together with appropriate explanations of cost differences. The Reports were based on data extracted from the contract costing systems which, in turn, were based on the financial accounting system; thus the Reports could be prepared at a minimal incremental cost. Whilst cost data were used in the Reports in routine monitoring, it is apparent that they were not accepted as being wholly satisfactory, for in exceptional circumstances, when problems arose on very large contracts, they were supplemented by alternative financial analyses. However, the Reports contain only one detailed critique of the fundamental cost data, this being in 1901 when Rowell, the head of the shipyard, presented a Report (TWAS 962/42, p. 137) to the Board on the ‘very unsatisfactory cost for the hull of the S.S. Canadian’. Estimates, cost data and Rowell’s analysis are summarised in Table 7. Rowell’s analysis may be construed as an example of special pleading, particularly since there is no extant record of any other manager presenting a similar case. Nevertheless, whether justifiable or not, his analysis does provide an interesting insight into features of the monitoring and control system that he felt had an impact on him as an accountable manager. First, the system did not allocate to individual ships any benefits or costs that might arise from the ‘terms or payment’ agreed with the client. Second, the system utilised two distinct internal shipyard pricing mechanisms which ‘inflated’ the costs charged to individual ships. The first mechanism involved the internal shipyard transfer pricing system which enabled sub-departments such as forgings and smiths to make a profit on work charged to ships (see Table 5). The second mechanism inflated the quantity of materials charged to ships in order to ensure that all materials issued from stock Table 7 S.S. ‘Canadian’ Estimates Contract price Cost Profit: Cost data Contract price Actual cost Loss: Rowell’s analysis Contract price Actual cost per accounting system Less adjustments for: 1. Benefit resulting from ‘terms of payment’ 2. ‘Profits’ on internal shipyard transactions 3. Excess cost of ‘charges’ and foremen 4. Excess cost of steel issue price over purchase price

£101,205 £100,140 £1065 £101,205 £110,150 £(8945) £101,205 £110,150 £3000 £2500 £1620 £1000 £8120

‘Corrected’ cost Loss Based on data extracted from TWAS 962/42, p. 137.

£102,030 £(825)

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on a weight basis were more than fully accounted for resulting in profits on stock accounts (see Table 5). Third, shipyard ‘charges’ or overheads were apportioned to ships on the basis of the total of material and labour costs; if this total increased, then the amount of overhead increased pro-rata. Fourth, materials were charged to ships at current cost rather than historic cost, probably in an effort to provide ships’ cost data that would be useful feed-forward information for future cost estimating. Taken together, these four factors were used by Rowell to form an argument that ship cost data were shaped by influences stemming from the conventions and needs of financial accounting and of estimating rather than the requirements of managerial control. Thus, when used at the macro level of the department, the accounting system provided profit data that may have been useful indicators of overall financial performance. At the micro level of the individual job, cost estimations were obtained but in terms of managerial control the system failed to provide suitable information. In employing the reports as part of their monitoring and control procedures, the directors of Hawthorn Leslie demonstrated a routine willingness to trade the benefits of more sophisticated information for the reduced costs of accounting-based data; although the system was called into question under exceptional circumstances, it continued to operate throughout the period 1897–1914. Changes to the contract costing system were considered in 1912 when the Company Secretary ‘proposed that a better system of reporting costs. should be introduced’ (TWAS 962/57/55). Although the importance of the proposal ‘was recognised unanimously’ by the Board, and it was considered several times, eventually it was shelved (TWAS 962/57/57–62), no explicit reasons being given for this. However, despite its shortcomings, the Reporting system did provide a key means by which results on individual jobs within departments could be monitored and scrutinised by the Board. 5.2. Capital Expenditure Decisions Edwards (1995, pp. 26–30) have noted examples of the role of a monthly reporting system in enabling Board scrutiny of proposed capital expenditures in the iron and coal industry of the late nineteenth century. They also comment (Edwards (1995, p. 28)) that ‘capital expenditures, once made, were then carefully monitored’. From the institution of Hawthorn Leslie’s Reporting system in 1897, it is apparent that capital expenditure proposals were prepared by each head of Department and a Report (TWAS 962/42) submitted to the Board for discussion and voting of funds (TWAS 962/55) at the subsequent Board meeting. Proposals always provided a detailed technical justification and an analysis of the practical, working impact of the proposed expenditure. The head of the St. Peter’s Works usually provided an assurance that the project would yield ‘an adequate return to the company for the expenditure of the capital’ (TWAS 962/42/203) or that ‘it would. effect a saving more than proportional to the outlay in capital’ (TWAS 962/42/67), and at times he backed these assurances with relevant financial analysis (e.g., TWAS 962/42/108). From time to time, although not always, the head of Forth Banks supplemented a technical justification of capital expenditure with a financial pay-back justification. However, although the head of the shipyard sometimes noted an annual cost saving expected from a capital expenditure project (e.g., TWAS 962/42/414), he usually relied upon justifications based on required improvements in

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technical performance and working practice. The Reporting process allowed the Board to scrutinize departmental capital expenditure proposals and, invariably, approve them. With regard to the monitoring of actual capital expenditures, the onus was placed on the individual director rather than on accounting or Reporting mechanisms. The Board stipulated (TWAS 962/55/39) that, in the event of any Director finding what he believes to be an urgent necessity for spending any more that has been voted by the Board for any special object, it was his bounden duty to lay the matter before the proper Committee as soon as possible and if necessary, apply for a special meeting. Thus, whilst systems and procedures for the scrutiny and monitoring of capital expenditure projects were clearly put in place, they required only limited inputs of managerial and accounting information. However, extensive sets of information were hardly required when the Reporting system was inaugurated in 1897. During the period 1886–1897, c. 75% of the net profits were distributed as dividends (TWAS 962/53) and, in the absence of significant injections of funds, there was little finance for capital investment. During this period, the balance sheet figure for fixed plant and machinery actually fell by 7% (TWAS 962/53). 5.3. Strategic Issues In his study of two British steel companies, 1898–1914, Boyce (1992, p. 61) notes that accounting ‘systems provide inputs into strategy formulation and their form evolves in line with the requirements of policy implementation’. He argues that one of the firms studied pursued aggressive and innovative policies, but was faced with difficulties because it failed to adjust its organisation and accounting controls accordingly; the other firm was successful in pursuing a ‘less adventurous policy which did not require innovations in organisation or systems’ (Boyce (1992, p. 62)). Boyns and Edwards (1995), examine how the Consett Iron Company modified its costing system in 1867 in an attempt to clarify the decision whether or not to dispense with its iron-making activities. However, they also note (Boyns and Edwards (1995), p. 35) that in addition to employing its internal accounting information and managerial expertise, the company also engaged external consultants to prepare reports on particular aspects of operations. Boyns and Edwards argue that the use of external consultants was unusual in the late nineteenth century iron industry, but, implies limitations, from the decision-making point of view, in the company’s accounting system which was backward looking. (and) not totally appropriate for decisions about closure of departments. which should be based not only on immediate past performance but also expectations of future developments. Although the company’s new costing system reported losses on iron making, the Consett Iron Company’s managers decided not to close down this activity. In making this decision, managers took into consideration the advice of an external consultant, the ‘ripple effect’ on the company’s other activities and the belief that iron making could be transformed into a profit making concern. Boyns and Edwards (1995), p. 48 argue that,

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These facts show that management at this time understood the complexities of decision making, recognised the need for information, undertook developments to ensure its availability and were not prepared to be rushed into closing a loss-making department when other considerations were paramount. With regard to Hawthorn Leslie, the current research now examines two debates on the proposed closure of departments regarded by at least some directors as loss-making activities: first the Forth Banks Locomotive Works, and second the Hebburn Shipyard. In a Report (TWAS 962/42, pp. 5–9) on Forth Banks in July 1897, Browne, the Chairman of Hawthorn Leslie, proposed that the Board should ‘shape its future policy differently from the past with a view to avoiding the losses that have been so heavy a drag on the company’. The problem at Forth Banks had been apparent to Browne for a long time: in 1879 he had noted that Forth Banks had produced an average loss of £1,800 per annum over the previous nine years (Clarke, n.d., p. 24), and from the formation of Hawthorn Leslie in 1886 through until 1896, Forth Banks had reported substantial losses in all but two years (Table 3). In his Report of July 1897, Browne argued that the directors should ‘abandon’ the locomotive trade and focus on developing boiler work at Forth Banks. Browne based his case on financial analysis, using data extracted from the financial reporting system supplemented by ad hoc financial calculations. However, there was also a strategic logic underlying Browne’s proposal, since there was a clear fit between the Shipyard, Engine Works and Boiler Works. Nevertheless, Browne’s proposal was opposed by Straker, the head of Forth Banks and a company director and shareholder, and a prolonged debate (TWAS 962/42/13–15/160–62; TWAS 962/54/178– 79/183; TWAS 962/55) took place through until 1902 when it became apparent that Straker’s view had prevailed: the Forth Banks Locomotive Works remained part of Hawthorn Leslie. Hawthorn Leslie’s accounting, contract costing and Reporting systems were unaffected by the debate on the proposed cessation of locomotive building, and, indeed, there was no need for them to change because of this debate. These systems served adequately to calculate and report losses at the micro-level of the individual contract and at the macrolevel of the activity of locomotive building. The historical nature of these systems, of course, meant that Browne used historical rather than forecast data in his closure proposal. However, Straker did not use forecast data either in voicing his opposition and nor did he use historical data. Indeed, Straker did not use any hard data in fighting his corner. Why, then, did Straker prevail when Browne presented a strong case based on financial and strategic logic? It is difficult to present any straightforward answer to this question. Straker was an important shareholder, but could easily have been outvoted by a coalition of other shareholders (Table 2). Straker came from a wealthy family that had provided loans to the company (Clarke, n.d., 23) but Hawthorn Leslie was by no means in thrall to him. For example, in 1898 the company raised £170,000 from an issue of debentures using about £100,000 to payoff existing mortgages leaving about £70,000 in the firm (Clarke n.d., p. 65); furthermore, Hawthorn Leslie had excellent relations with its bankers: in 1914, Browne (1914, pp. 6–7) wrote that the firm ‘was entirely made by the Bank’ and owed much to the bank’s ‘most extraordinary liberality in the matter of financial accommodation and overdrafts’. Long after the closure debate of 1897–1902 was over, Browne reviewed

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the development of the firm and, concerning locomotive work, commented (Clarke, n.d., p. 25) that, it would have paid us to give up the locomotive trade altogether as far as mere money is concerned, but there was a widespread feeling of unwillingness to abandon an old and celebrated business; we also had a body of particularly high-class and loyal workmen whom we did not want to turn adrift; and, of course, we always hoped that something would turn up sooner or later. Reflecting upon this comment, the company historian remarks (Clarke, n.d., p. 25) that, although there are those who may want to doubt the sentiments expressed above, they will have great difficulty in pointing to a simple profit motive as a justification for continuing to build locomotives at Forth Banks. Straker who became a partner [in 1876] at the age of 23 had a life long association with Forth Banks until his death in 1934. he did enjoy managing a locomotive works and secured the support of his co-partners, and later co-directors, to continue the works as long as the business overall could carry it. Of course, there were occasions when locomotive building was profitable but these were only brief spells. One of the ‘brief spells’ of profitability occurred after the closure debate of 1897–1902, but by the 1920s the ‘Board was only too well aware of the unprofitability of locomotive building at Forth Banks’ (Clarke, n.d., p. 89). However, in 1929 and in 1930 Straker managed to fight off separate attempts to sell Hawthorn Leslie’s locomotive building works, noting (Clarke, n.d., p. 91) that ‘This Company. recognising its record and duty to its employees has worked hard to try and win through.’ Following Straker’s death in 1934, Hawthorn Leslie merged its locomotive building interests with those of another firm in a newly formed limited company. In 1943 Hawthorn Leslie sold off all of its shares in this locomotive company, ending 112 years of locomotive building (Clarke, n.d., p. 91). It is apparent that Hawthorn Leslie’s accounting contract costing and Reporting systems had worked satisfactorily, without the need for change, in helping to make the financial and strategic case for the closure of Forth Banks. Reasons for the continuance of locomotive building seem to lie in the areas of Straker’s personality and influence, together with the weight of history, tradition and loyalty, underlain by the hope that ‘something would turn up sooner or later’. Hawthorn Leslie’s accounting, contract costing and Reporting systems were further employed, unchanged, in 1900–1902 in another divestment proposal, this one being sparked off by the directors’ perception of the ‘unprofitable working’ of the shipyard. The head of the shipyard responded to the directors’ concerns with a comprehensive Report (TWAS 962/42/20–28) analysing in detail, but in non-financial terms, the ‘causes of unprofitable working’. However, a non-executive director continued to question (TWAS 962/55/62) the shipyard’s profit performance. Ultimately, this non-executive director proposed and the Board agreed, to commission a technical evaluation of the shipyard by external consulting engineers (TWAS 962/55). The consultants’ report was received and Browne proposed,

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that a Committee be appointed to consider the best means in the interest of the shareholders, of dealing with or disposing of the Hebburn Shipyard and the Shipbuilding Business, and report to the Board, and it was decided that the Committee should be the Finance Committee and Mr T Harrison of Messrs. Monkhouse Goddard and Co. (the company’s auditors) (TWAS 962/55/79). Thus a shipyard problem which had been expressed originally in the financial terms of ‘unprofitable working’ and ‘small profit’ was now to be investigated by a Special Committee on the Hebburn Shipyard, consisting of the Finance Committee and the company’s auditors. On 21 January 1902, Browne commissioned the auditors to prepare a report on the shipyard. The report was duly presented (TWAS 962/200) to the Finance Committee in February 1902. This report was very much an accounting exercise rather than a strategic business appraisal and noted that, we have abstracted from the accounts a statement of the separate profits and losses of the three departments (shipyard, engine works and locomotive and boiler works). we have distributed the general management expenses and other items not chargeable against one department, over the three proportionately to the amount of capital respectively employed in each. The result of this analysis was, of course, an essentially arbitrary distribution of expenses and calculation of profit. These problems were compounded by the fact that the ‘capital employed’ in each of the three departments had been determined by the arbitrary apportionment to departments of company loans, bills, cash in bank, goodwill and debentures. Nevertheless, having calculated some numbers for departmental ‘profit’ and ‘capital employed’, Messrs. Monkhouse Goddard and Co. calculated a five year average ‘return on capital employed’ for each department: engine works 8.97%, locomotive and boiler works 3.68% and shipyard 1.92%. However, in their report they were obliged to admit that, In view of the prosperity which has attended the shipbuilding industry during the last five or six years, we are at a loss to understand how the... Hebburn shipyard. only show(s) a return of 1.92% on the Capital Employed. Despite their acknowledged lack of understanding of shipbuilding, the historic rather than future orientation of their report and the absence of business and strategic analysis, Messrs. Monkhouse Goddard and Co. concluded categorically that the required course of action was to ‘dispose of the Hebburn business by sale outright’, neglecting even to consider the impact on the Engine and Boiler works of losing at least an element of the Hebburn Shipyard trade. The Board minutes (TWAS 962/55) for March 1902, indicate that the ‘Report of the Special Committee on Hebburn’ was presented to the directors, but the archive does not contain any record of a written report other than this. However, one of the directors, formerly also the Company Secretary, did make an unrecorded oral report to the board in March 1902 on ‘the present position of affairs in connection with the Hebburn assessment’ (TWAS 962/55 p.86). Although there is no archive record of the directors’ views of the competence of the auditors’ financial analysis or the soundness of their strategic proposals, the Board did not follow their advice and did not dispose of

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the Hebburn shipyard by ‘sale outright’ or any other means, and this department of the company operated profitably through until 1914. Although the accounting and reporting system was employed as a source of information regarding the shipyard closure decision, no attempts were made to upgrade, refine or adapt this system in order to provide better information. The Hawthorn Leslie accounting and management reporting system was unaffected by the two strategic debates regarding the Forth Banks Locomotive Works and the Hebburn shipyard. These debates indicate that although financial information was introduced into strategic decision making processes, it could be out-weighed by non-financial considerations. Thus Hawthorn Leslie’s first major development in managerial information was the production of Reports for Directors’ Meetings and their use primarily in three important areas: monitoring and control, capital expenditure decisions, and strategic issues. Given growing capital expenditure in the early 1900s, the firm’s second major development in managerial information related specifically to capital expenditure reporting. 5.4. Capital expenditure reporting As noted previously, little capital expenditure was undertaken by Hawthorn Leslie in the years 1886–1897. However, after this period, capital expenditure was increased, so that by 1914 plant and machinery, and buildings stood on the balance sheet at twice their 1897 figure (Clarke, n.d., p. 74). In 1907 a formal system of capital expenditure reporting was instituted. From 1907, formal records of capital expenditure (TWAS 962/300) were prepared for each department detailing, project by project, the expenditure authorised by the Board, together with a listing of actual expenditures. From 1910, the routine monthly departmental Reports (TWAS 962/42) submitted to the Board included ongoing project by project analysis of capital expenditure detailing funds voted and actual expenditures made and committed to date. In 1914 it was agreed (TWAS 962/57) that when heads of departments required urgent authorisation for capital expenditure they should obtain the sanction of the Finance Committee. However, all capital expenditure had to be authorised. Usually, the Finance Committee authorised smaller Projects (for example, TWAS 962/62. p. 13: £100) whilst it forwarded larger proposals (for example, TWAS 962, p. 11: £1,005) to the Board along with a recommendation. Almost invariably the Finance Committee and the Board approved capital expenditure proposals submitted to them. At this stage, funds were allocated and controlled at project rather than departmental level. However from 1916, acting in a newly created position, the company treasurer prepared regular departmental statements of capital expenditure (TWAS 962/62) and the Finance Committee took an overview of the ‘capital commitments at all three works’ (TWAS 962/62, p. 175). Thus, Hawthorn Leslie progressively extended its capital expenditure procedures and reporting systems to ensure that projects and, ultimately, departmental spending, were subject to central approval and scrutiny, with the Finance Committee eventually playing a key role in these processes. Based on data extracted largely from the accounting system, the capital expenditure reporting system provided the company with important information at minimal additional cost.

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6. Summary and conclusions In 1914, Hawthorn Leslie’s organisational structure and business strategy were essentially the same as they had been at the time of the merger in 1886: the firm undertook the same four activities, constructing ships, engines, boilers and locomotives, and it operated in the same three departments, Hebburn, St. Peter’s and Forth Banks. Although there were changes in personnel as time went by, the length and continuity of service of the directors is notable. At times, personal and non-financial factors, rather than financial information, weighed heavily in the directors’ decision making. Furthermore, the directors were evidently reluctant to employ clerical labour or to develop new costing systems. In this context, it is unsurprising that in 1914, Hawthorn Leslie’s accounting and costing system was, in essence, the same as it had been at the time of the merger in 1886. Indeed, this system was simply a continuation of the system that had existed in Hawthorn’s from at least 1871. All three of the research propositions examined in this paper have been confirmed: first, a high level of continuity was a significant feature of Hawthorn Leslie’s accounting and costing system; second, management information needs were met by adapting and reconfiguring existing systems rather than by developing new ones; third, the production of increasing amounts of information outside of the accounting ledgers suggests that the direction of systems development was towards an increasing separation of financial and cost accounting systems rather than towards integration of them. Thus the current research provides evidence and analysis to confirm and augment the new conventional wisdom of the development of British cost accounting as portrayed by neoclassical revisionists (e.g., Boyns, 1993; Boyns et al., 1996; Boyns and Edwards, 1995, 1997a,b; Fleischman and Parker, 1990; 1991). Furthermore, this study of Hawthorn Leslie re-enforces the view of Edwards and Boyns (1995, p. 36) that the uses to which cost accounting is put are many and various, ‘including pricing, preparing estimates, measuring profitability of departments and products. and helping management make investment decisions’. The current paper also confirms Boyns and Edwards (1996, p. 17) in their finding that ‘the main motivation for accounting innovation in Britain was not to enable the control of labour, as some have argued was a growing preoccupation in the US context, but to aid the provision of performance indicators considered relevant for a range of routine and strategic decisions’. In a study of the twentieth century shipbuilding, engineering and metals industries of the West of Scotland, Fleming et al. (2000, p. 195), drawing on McKinstry (1999), note that ‘an engineering culture amongst management inhibited the development of costing’ In Hawthorn Leslie there is little evidence of this, but it is apparent that a constraint on the development of costing was the desire to avoid the fixed costs of costing staff, particularly given the cyclical nature of this capital goods industry. However social and cultural influences may have had important implications in terms of approaches to the use of accounting and costing based managerial information. This is seen most clearly in Hawthorn Leslie in relation to the proposed closure of the Forth Banks Locomotive Works, when a loss making department was kept open despite, rather than because of, the weight of financial and strategic analysis. This finding resonates with Boswell’s (1983, p. 237) analysis of the period 1880–1939,

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It is an obvious fact that British society during this period expected much more than economic dynamism from its business system. it can be argued from the. data that businessmen were frequently swayed by ‘social motivations’: ethical restraints on profit-seeking, social sympathies, local pride, chauvinism, desires for social approval and honours, fears of public obloquy, and concepts of collective interest. To ignore such motivations is unrealistic. To identify them with such assumed ‘fundamentals’ as long-run profit-seeking, class-interest, or fear of coercion reflects often unacknowledged philosophical positions that are highly debatable. Surely a variety of cultural and socio-institutional influences needs to be examined. Inter alia, the findings of the current research help to emphasise the point that a continuing awareness of the potential impact of ‘a variety of cultural and socioinstitutional influences’ on managerial behaviour and decision-making will enhance the neoclassical revisionists’ new conventional wisdom of the historical development of cost accounting.

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