Fernando Gutiérrez UNIVERSIDAD PABLO DE OLA VIDE DE SEVILLA
Carlos Larrinaga UNIVERSIDAD DE BURGOS

and

Miriam Núñez UNIVERSIDAD DE SEVILLA

COST AND MANAGEMENT ACCOUNTING IN PRE-INDUSTRIAL REVOLUTION SPAIN

Abstract: In traditional Anglo-Saxon accounting historiography the birth of sophisticated management accounting practices was dated at the end of the 19th century [Jonhson and Kaplan, 1987]. However, some more recent investigations have questioned this idea and demonstrate the existence of sophisticated management accounting and control techniques before the industrial revolution in differing contexts such as the United Kingdom, the United States and Spain. Fleischman and Parker [1991] have demonstrated that these practices were present in a significant number of British companies. However, evidence for Spain is based on isolated case studies. While case studies are essential to explain how these techniques were used, there has been no research to assess their frequency in Spain before the industrial revolution. By examining files concerning 13 large and medium-sized 18th century Spanish companies, this paper corroborates Fleischman and Parker’s [1991] thesis. It reveals that knowledge of sophisticated cost accounting methods was fairly widespread in Spain during the 18th century. Interestingly, however, the knowledge and use of these techniques were not connected to economic success and to the industrial revolution, as was the case in the United Kingdom.

INTRODUCTION

Management accounting historiography traditionally sus-tained the thesis that most of the costing techniques used before the late 19th century were very rudimentary [see Fleischman

Acknowledgments: We are grateful to Cheryl McWatters, Salvador Carmona, two anonymous reviewers and the editor for their helpful comments on earlier versions of this paper. Financial support received from Dirección General de Investigación (SEC2001-2633) is also acknowledged.

and Tyson, 1993; Loft, 1995].1 According to Chandler, modern cost accounting emerged in the U.S.A. after 1850 with the advent of the railroads and large companies’ needs for sophisticated administration and coordination [see Johnson, 1972]. Pollard [1965] arrived at a similar conclusion in the British context and argued that the development of cost accounting to support management was not among the achievements of the British industrial revolution. His explanation was based on the high profits the early companies in the industrial revolution achieved (which rendered cost accounting unnecessary), and on the lack of integration between cost and financial accounting.

The majority of the early Anglo-Saxon studies that dated the advent of modern cost accounting to the late 19th century were not based on the examination of business archives which might reveal accounting practices in real settings. Rather, this conclusion was based on the lack of references to costing techniques in accounting manuals (primarily directed to merchants) before the 19th century [Johnson, 1972; Fleischman and Tyson, 1993; Fleischman and Parker, 1997]. This argument was also made in non-Anglo-Saxon countries. For example, in his examination of the history and doctrines of European accounting, Vlaemminck [1956] contended that industrial accounting attracted the attention of accounting authors only from the beginning of the 19th century and that practice preceded accounting treaties.

In recent decades some accounting historians have tested traditional assumptions about the use of cost techniques by investigating surviving business records [Johnson, 1972; Fleischman and Parker, 1990, 1991; Edwards and Newell, 1991; Fleischman et al., 1996; Fleischman and Tyson, 1993, 1996]. However, until very recently, the extensive study of early cost accounting practices through the examination of surviving business archives in the U.K. and U.S. has not been matched by studies in continental Europe.

The reasons for this are difficult to fathom. Admittedly, the British industrial revolution was unique and associated with particular socio-political changes [Wilward and Saul, 1973].

1For the purpose of this paper, we do not make any distinction between terms such as ‘costing’, ‘cost accounting’, ‘management accounting’, or ‘managerial accounting’. We use these terms interchangeably to refer to the use of cost-based information for various purposes. The use of any of these terms does not imply per se any commitment to a particular theoretical framework.

Arguably, the introduction of sophisticated costing techniques by British entrepreneurs during the industrialization could have resulted from other significant economic advances [Fleischman and Parker, 1991]. But continental European manufactures reached a comparable level of complexity and technological innovation [Herr, 1958; Townsend, 1791]. Wilward and Saul [1973] argue that transformations in Europe were caused by external events, by the unbalancing of political power brought about by increasing productive capacity in Britain. Concerns about the distribution of power led continental governments to become variously involved in manufactures, whereas the British industrial revolution was based on entrepreneurship. These facts would fit with a notion of cost management developed by entrepreneurs to face competitive markets and tight profit margins [Fleischman and Parker, 1991]. However, there is increasing evidence – especially for Spain – of the early use of sophisticated costing techniques in organizations operating in non-competitive markets [Hoskin and Macve, 1986, 1988; Carmona et al., 1997; Núñez, 2002a; Carmona and Donoso, 2004] and in firms operating in competitive markets with gov-ernmental support [Prieto and Larrinaga, 2001; Carmona and Gómez, 2002].

The present study of organizations in 18th century Spain provides evidence not only of the evolution of cost accounting in a continental European country, but also of its practice and development in settings characterized by limited competition and monopolies conducted by the Crown. While some such evidence already exists in the form of the case studies above-mentioned, this paper aims to extend their conclusions by exploring whether sophisticated cost accounting techniques were present in 13 large and medium-sized Spanish companies during the second half of the 18th century. The paper presents the results of a systematic and cross-sectional study, along the lines of the research conducted by Fleischman and Parker [1991] for British firms. The paper is structured as follows. The next sec-tion provides a brief introduction to the manufacturing environment in 18th century Spain, paying particular attention to government involvement. The subsequent section describes the categories and features that modern cost accounting should evince, according to the existing literature. Thereafter the research method is explained. The findings are then presented and interpreted, and their wider relevance for understanding the advent of sophisticated cost accounting are explored. Then follows some concluding remarks.

SPANISH MANUFACTURES, 1760-1800

When Carlos II, the last Hapsburg monarch, died in 1700, a new dynasty, the French Bourbons, settled in Spain. This dynastic change brought about innovations in social and economic policy inspired by the Enlightenment principles of rationality and the search for public happiness. One of the peculiar instruments for the diffusion of Enlightenment ideas was the Economic Societies of the Country’s Friends (Sociedades Económicas de Amigos del País) [see Álvarez-Dardet et al., 2004], which constituted a medium for pursuing the extension of education among the peasantry and played an active role in the economic development of Spain [Sarrailh, 1992]. The reign of Carlos III (1759-1788) was a period when Enlightenment ideas had much influence. Out of a sincere desire to improve the nation, Carlos III fostered new ideas and promoted to power key Enlightenment intellectuals (such as Floridablanca, the Conde de Aranda, Campomanes, Carrabús, and Jovellanos) [Herr, 1958; Vicens Vives, 1987]. While Enlightenment principles were commonly adhered to, fear of the consequences of the French Revolution after 1789 moderated their advance [Vicens Vives, 1987].

Spanish economic policy in the 18th century was the out-come of a conflict between protectionism and economic liberalism [Vicens Vives, 1987]. On the one hand, economic policy was based on the reformulation of the colonial pact in favor of metropolitan industry and trade [La Force, 1965; Anes, 1994]. Following mercantilist ideas, policy was aimed at creating a more regular and competitive trade in order to decrease foreign competition and maintain the monopolist advantage of some privileged Spanish companies, such as the Caracas Trading Company [Vicens Vives, 1987; Eugenio, 1988]. Protectionist measures for the textile industry, such as the banning of fabric imports and the restriction of raw material exports, were passed from the early 18th century. The nightmare of Spanish mercantilists was the legitimate importation or smuggling of French and English goods that were aimed mainly for colonial trade. It has been estimated that by the end of the 17th century only one-eighth of the goods shipped from Spain to America were manufactured in Spain [Herr, 1958].

On the other hand, Spanish economic policy was also influenced by physiocrat ideas, or a form of advanced mercantilism [Herr, 1958]. Under Carlos III, the government ended the restrictions on trade between Spain and the colonies [Herr, 1958].

Further, the previous attitude towards favoring the guilds shifted and the Council of Castile engaged in curtailing all the restrictive aspects of guild regulations [Lynch, 1991]. For ex-ample, the guild regulations on the manufacture of cloth were completely eliminated by 1787.

Political reforms in 18th century Spain were carried out under monarchial absolutism. Administrative uniformity and rationalization was to be achieved through the suppression of the ancient charters of some regions. Vicens Vives [1987] argues that the main mechanism for implementing the Crown’s policies of uniformity was the abovementioned Council of Castile. This institution brought about a rationalization of taxation and sought to overcome the traditional differences in taxation between the various regions. Also important in relation to uniformity were the monopolies. These constituted an important source of public revenues at this time. Vicens Vives [1987] contends that among the salt, playing cards and tobacco monopolies, the last mentioned was most remunerative, raising as much as 82,000,000 reales in 1797. The preference for uniformity and the need to increase revenues to sustain the empire led to placing public activities and leased monopolies (like the gunpowder monopoly) under direct state management, often in the form of royal factories. This was the case with tobacco, which was manufactured in the Royal Tobacco Factory of Seville. The changeover to direct state control of the Crown’s monopolies began in 1741. It culminated in 1761 with the issue of the Instruction for the Internal Administration of the General Board of Monopolies, and specific instructions for provincial and general monopolies, salt mines, textile factories, lead mines, and gunpowder production [Artola, 1982, p. 254].

Royal Factories: Spanish entrepreneurs failed to secure the production of sufficient goods for the trade with the Spanish colonies. In order to halt the consequent dependence on manufacturers in other European countries, the Bourbons created royal factories along the lines of French Colbertism [Helguera, 1991; Fernández et al., 1992]. Foreign machinery was imported to establish the new manufactories [Anes, 1994]. As well as producing competitive goods for both the colonial trade and the Iberian market, the royal factories served at least three other purposes. First, they were conceived as technical institutions for the dissemination of industrial knowledge and skills [La Force, 1965]. Second, in the case of some monopolies the royal factories were also devised to maximize public revenues. Third, even though in the early 18th century royal factories were compatible with guilds, following the liberal reforms begun under Carlos III, they were used as instruments to destroy the guild privileges.

The term ‘royal factory’ is confusing and, according to several authors [La Force, 1965; Helguera, 1991], relates to three different types of companies. First, those that enjoyed some kind of tax exemption. Second, those organized as public companies, in which the king and/or the royal family had some participation (called Royal Joint-Stock Companies by La Force [1995]) and secured resultant privileges in exchange for state involvement. Third, those companies created on the state’s initiative, wholly financed by and charged to the Treasury and predominantly run by civil servants. This was the case with the Royal Textile Factory of Guadalajara, founded in 1718 [La Force, 1965], the Royal Tobacco Factory [Carmona et al., 1997], and the Gunpowder monopoly [Núñez, 1999].
The fortunes of the royal factories varied. Generally, only those that effectively placed monopolies under governmental management accomplished the aim of increasing public rev-enues. This was the case with the Royal Tobacco Factory and the Gunpowder monopoly. In contrast, those royal factories that aimed to compete with the import of fabrics and other goods were not financially successful. Herr [1958], La Force [1965], and Vicens Vives [1987] provide details of the misfortunes of some of the royal factories. Herr [1958] attributes limited success to poor management, high transportation costs (for central manufactures in mountainous Spain), and the resistance of guilds. La Force [1965], referring to the royal textile factories, argues that they were established according to purely technical rather than economic considerations. Diseconomies of scale emerged because factories were integrated before the advent of cost-reducing technologies [La Force, 1965]. However, large factories were needed in order to overcome the most important shortcoming of Spanish industry – the lack of skilled workers. Integration was pursued to develop learning, and the solution envisaged was to “import” foreign skilled craftsmen [Larruga, 1794]. As a result of these problems the royal textile factories depended on royal subsidies to survive. One of the most extreme cases was the Royal Textile Factory of Guadalajara, which required 2,000,000 reales per annum during the reign of Fernando VI (1746-1759).

Along with the rest of Europe, Spain experienced a period of economic growth in the second half of the 18th century, which was reflected in a population increase of 40% [Lynch, 1991]. This fact meant a growing demand for products and an increasing supply of labor for manufacturing work. Lynch [1991] estimates that 200,000 people worked in the industry and service sectors by the end of the century. Arguably, Spanish industrialization also contributed to greater prosperity. By 1789 the share of Spanish-made goods in the trade with the colonies had increased to one half, compared to one-eighth in 1700 [Milward and Saul, 1973].

Yet, by the end of the 18th century the economic advance was halted. There were a number of reasons for this. First, the fear caused by the French Revolution slowed and even reversed the pace of reform [Burrel, 1988]. For instance, in 1791 all pri-vate Spanish periodicals were suspended [Herr, 1958]. Second, the war between England and Spain, which broke out in 1796, contributed to the loss of trade routes with the Americas until 1802. Vicens Vives [1987] estimates the loss of trade to the port of Cadiz, the busiest in Spain, at 2,700,000 reales. Third, freedom of trade between the Americas was granted in 1778 and reinforced in 1797, signifying the beginning of the colonies’ independence. Finally, the Spanish economy was adversely affected by the Napoleonic invasion of Spain (1808-1814). All Spanish manufacturers suffered during this period. Vicens Vives [1987] contends that from 1800 until 1832 the textile industry returned to a predominantly artisan character.

In summary, the context of Spanish manufacturing during most of the 18th century was characterized by change inspired by the Enlightenment. The pace of reform increased after 1759, with the support of Carlos III. Some of the reforms were aimed at free trade, while others, such as the creation of royal facto-ries, were aimed at the protection of national industries. For manufacturing concerns in Spain the mid-late 18th century was a period of economic success followed by adversity.

LITERATURE ON THE ADVENT OF SOPHISTICATED COST AND MANAGEMENT ACCOUNTING

A growing body of research has supported the revision of Pollard and Chandler’s thesis by revealing the use of sophisti-cated cost accounting techniques in different settings before the second half of the 19th century. Johnson [1972] examined the cost management techniques used in a textile mill, the Lyman Mills Corporation (U.S.), before 1860. He concluded that its elaborate costing system was used to facilitate internal control of operations. From 1819 the Springfield Armory (US) also kept detailed records on raw materials, processes, and finished products, as well as on the average time required to perform each task and every worker’s wages. From 1840 more frequent use of these techniques was applied to improve internal control [Hoskin and Macve, 1988; Tyson, 1990]. Fleischman and Parker [1990] have also established the existence of advanced management accounting techniques in the Carron Company, a forerunner of industrialization in Scotland.

In the Spanish context, Carmona et al. [1997, 1998] have documented the existence of modern cost accounting techniques in the Royal Tobacco Factory of Seville before 1779. Flores [1983], Prieto and Larrinaga [2001], Núñez [2002a], and Carmona and Gómez [2002] have also examined the use of sophisticated cost accounting techniques in several Spanish companies during the second half of the 18th century. They studied specific cases in depth, analyzing the particular circumstances that gave rise to the use of cost accounting and demonstrated the existence of sophisticated costing techniques in settings characterized by the absence of competitive markets and extended governmental intervention. Despite these advances in identifying the use of costing in Spanish concerns, there remains a lack of cross-sectional surveys that would permit the generalizing of findings beyond the isolated cases studied to date.

Thus, the aim of this paper is to explore the extent of cost accounting practices and knowledge in 18th century Spain. Fleischman and Parker [1991] conducted a cross-sectional study of 25 British companies, forerunners of the industrial revolution, with the aim of exploring Pollard’s thesis. To perform this kind of analysis, it is necessary to establish categories that can be investigated in each of the cases examined. Fleischman and Parker assumed that the development of sophisticated cost accounting equaled the frequent use of certain costing techniques: (i) the use of cost control techniques, including costing based on responsibility centers; (ii) overhead allocation to products; (iii) the use of costs for decision making (including cost comparison), and (iv) the use of budgets, forecasts, and standards. While Edwards and Newell [1991] also reviewed several cases where an appreciable development in cost accounting existed before 1850, the categorization proposed by Fleischman and Parker [1991] is more systematic and is adopted here.

Of the 25 British companies studied by Fleischman and Parker [1991], the majority (72%) routinely recorded costs. More precisely, costs were used to control materials, waste, labor and even the profitability of different blends of materials. Some textile mills also recorded daily production measures. Other companies managed their costs through the use of responsibility centers, and in these organizations there was evidence of profit calculation. As regards overhead allocation to products, 64% of the companies added manufacturing and commercial overhead to direct production cost, although only 20% did an excellent job of overhead allocation (Fleischman and Parker [1991] do not define the difference between ‘excellence’ and mere ‘activity’ in a given area). Costs of up to 31 different batches were calculated, and arguments based on the contribution margin logic were also present. Of the 25 companies, 56% used cost information to make decisions on technological innovation, vertical integration, the abandonment of production lines, or alternative merchandise transport routes. However, only 28% did an excellent job in this area. Finally, in 80% of the cases Fleischman and Parker identified the application of some kind of standard, usually to control inventories and occasionally in relation to budgeting. The association between standards and inventory control was in some cases related to the awareness of the difference between manufacturing cost and the realizable net value for obsolete products. Moreover, some businessmen also conducted sophisticated experiments to establish standards for different processes.

The approach followed by Fleischman and Parker [1991] and other authors such as Tyson, Boyns and Edwards has pro-voked a number of critiques. Loft [1995] brands such work the “revision by neoclassicists of traditional history”. Hoskin and Macve [2000] charge this approach with three different levels of problem. First, at the theoretical level, they contend that Fleischman and colleagues oversimplify causality in conceiving the new accounting practices of the 18th and 19th centuries as driven by the need for coordination in larger industrial firms. Rather, Hoskin and Macve [2000] maintain that we should consider whether causes include other organizational, social and economic changes. Recently, Boyns and Edwards [2000, p. 153] have acknowledged that sociopolitical and historical contexts may be important factors in the adoption of management accounting. Moreover, recent collaborations between Fleischman and Macve [2002] suggest that the so-called neoclassical revisionists and their critics recognize the potential relevance of their respective theoretical positions. As is suggested by the brief historical context provided earlier in the current paper, the authors consider that the social and political contexts are important to understanding the adoption of cost and manage-ment accounting techniques in Spanish concerns.

Second, at an evidential level, Hoskin and Macve [2000] contend that it is not possible to infer purpose from the exist-ence of formal accounting records. That is, the evidence of complex cost accounting records-related to past performance and to the preparation of double-entry accounting ledgers- permits only assertions about how techniques ‘might’ have been utilized. Imposing present-day categories on the past can also be a misleading line of causation. However, Hoskin and Macve [2000] admit that the purpose of cost accounting can be inferred if the accounts compute future outcomes, if they are prepared in the context of decision making or negotiation, or if they are used as a base for contractual negotiations. In order to avoid these evidential pitfalls, we have carefully examined the context in which cost accounting practices were introduced and applied.

Finally, at the historiographical level, Hoskin and Macve [2000] question the general significance of routine cost and management accounting practices, as investigated by authors such as Fleischman and Parker [1991]. In contrast, Hoskin and Macve [2000, p. 109] argue that the “historical crux is to identify the discontinuity between early attempts at costing for accountability, decision making, and control purposes, and what may be seen as the modern approach based in a human accounting”. They hypothesize that human accounting emerged in the U.S. during the second half of the 19th century. Nonetheless, Hoskin and Macve [2000], together with Fleischman and Tyson [1993] and Boyns and Edwards [2000], agree on the desirability of further research in cost and management accounting history and encourage the examination of business records for all countries [Boyns and Edwards, 2000, p. 157]. It is hoped that the evidence presented in this paper will contribute to these debates in the history of cost and management accounting.

RESEARCH METHOD

While pioneering British firms have been the focus of much attention [Fleischman and Parker, 1991], their contemporaries in Spain have not been systematically studied through surviving business records. In Spain information on archives containing business records is dispersed and the relevant collections have received less consideration than state administrative documents. Therefore, we devised a research method comprising of three different approaches in order to identify the records of Spanish companies during the second half of the 18th century and analyze their cost and management accounting practices.

First, we examined cases already covered in the literature: the Royal Tobacco Factory of Seville [Carmona et al., 1997, 1998], the Riotinto Mines [Flores, 1983], the gunpowder mo-nopoly in New Spain [Núñez, 2002a, b], and the Royal Textile Factory of Ezcaray [Prieto and Larrinaga, 2001]. Second, we explored surviving business records of other factories contained in various archives, mainly in the Archivo General de Simancas and the Secretaría y Superintendencia de Hacienda section (AGS-SSSH), which contains state administrative documents dealing with economic matters during the relevant period. Third, we considered the indirect evidence contained in contemporary printed sources, in particular, Larruga’s Political and Economic Memoirs [1794].

We focus on factories, on the assumption that cost accounting most probably emerged and gained some degree of sophistication in this kind of organization. The institutional context of the period (1760-1800) should be taken into consideration, since in Spain the most important factories were owned by the Crown or benefited from some kind of royal protection. These links with the Crown explain not only the development of administrative and accounting techniques (given the obligation to render accounts), but also the survival of records.

It is difficult to establish the total population of firms dur-ing the period studied. Admittedly, the fact that our sample contains only 13 cases, while Fleischman and Parker [1991] analyzed 25, could limit the wider validity of the conclusions. However, it should also be considered that (i) for the reasons explained above, the period we examine (1760-1800) is less than half that studied by Fleischman and Parker; (ii) as we have also argued above, the industrial fabric of 18th century Spain was less developed than that of Britain; (iii) our cases span a broad spectrum of capital-intensive industries and include the most important companies in the textile, mining, and tobacco industries – companies that have been cited by economic historians such as Herr [1958], La Force [1965], and Vicens Vives [1987]. Further, (iv) and more importantly, our conclusions are conditioned by the Spanish political and institutional context, which encompasses a particular category of companies (the royal factories and the rentas, or monopolies belonging to the Crown).

In the British case, Fleischman and Parker [1991] estimated the survival of costing records at less than ten percent. This survey encountered a similar difficulty. Bookkeeping for financial accounting is more easily found in the Spanish archives. Thus, for instance, all the files studied in the AGS-SSSH contain documentation gathered by the Junta General de Comercio y Moneda (Royal Committee for Trade and Money), which represented the Crown’s interests in these manufactures. Fortunately, despite the overwhelming dominance of financial accounting records, a careful archival survey allowed us to identify evidence of costing practices. For all the organizations examined for the period 1760-1800, files existed containing evidence of the use of costing techniques. While in some cases a complete series of costing and budgeting records survive or exist, in other instances we have only isolated cost studies for decision making or a reference to them in the correspondence.

In addition to the AGS-SSSH, we visited private archives to examine the Royal Tobacco Factory case (Historic Archives of Altadis). Primary sources for the gunpowder monopoly were gathered at Seville’s Archivo General de Indias (AGI), which contains copies of the accounting statements required by the Contaduría General del Consejo de Indias (Council of the Indies General Accounting Office). As in the case of the AGS-SSSH, information on costing was found with financial accounting information.

Memorias Políticas y Económicas [Larruga, 1794] is a 30-volume treatise about the advancement of Spanish industry in the last years of the 18th century. It is a descriptive account, with occasional physiocratic remarks, that essentially transcribes documents from diverse origins, mainly the companies themselves. For some companies, we verified Larruga’s references to costing exercises against the records found in the archival survey. Larruga is also referred to by economic historians such as Herr [1958] and Vicens Vives [1987]. We thus consider evidence contained in the Memorias as important primary source material.
We analyzed all information from primary and secondary sources according to the four criteria mentioned by Fleischman and Parker [1991]. As the cases vary in quantity and quality of information, we devised a checklist which covered the four ar-eas of costing activity and allowed us to describe and contrast all the companies’ activities in outline form (see Appendix 1).

DESCRIPTION AND INTERPRETATION OF FINDINGS

Table 2 shows the degree to which each company satisfies the four main criteria for ‘sophisticated’ cost management.

Following Fleischman and Parker, we have distinguished be-tween companies that show some kind of activity in a particular area (sporadic use of a technique, denoted with an ‘A’) and those with an excellent development (formal definition and routine application of cost management, denoted with an ‘E’).

TABLE 2

Spanish Factories Practicing Management Accounting in the Second Half of the 18th Century
Institution Costs Control Overhead Costs for Standards,
(Responsibility Allocation Decision Forecasts,
Centers) Making and Budgets
Esparto Textile Factory of Vallejo A A – –
Alcoraya Mine A – – –
Río Tinto Mines E E E –
Royal Liqueur Factory of Madrid E A E –
Royal Arsenal of Eugui and Orbaiceta E – – E
Royal Textile Factory of Cuenca A – – –
Royal Textile Factory of Ezcaray A E A E
Royal Textile Factory of Guadalajara E E E E
Royal Textile Factory of San Fernando A A – A
Royal Textile Factory of Segovia E E – A
Royal Gunpowder Factory of New Spain E E E E
Royal Tobacco Factory of Seville E E E E
Royal Textile Factory of Ávila E – A A
Total Activity 13 9 7 8
Percentage 100% 69% 54% 62%

‘A’: companies that show some kind of activity in a particular area (sporadic use of a technique).
‘E’: companies that show an excellent development (formal definition and routine application of cost management).

At first glance, Table 2 illustrates that cost accounting was often used by companies in Spain during the second half of the 18th century. All the companies in this study carried out some form of production cost control. More than two-thirds allocated manufacturing overhead, and more than half used that information for decision making and to elaborate a form of standard or budget.

Cost Control: As Table 2 shows, every company in the study undertook some kind of cost control. In the tobacco and gun-powder factories and in the arsenal, materials were weighed, registered, and controlled as they passed through the different phases of production, and there were rules for these procedures. For instance, in the tobacco factory snuff underwent a complex production process involving seven stages (sun drying, first milling, mixture, airing, second milling, fermentation, and distribution), which was controlled by a manager who was held accountable. Control was based on accounting records and aimed essentially at avoiding the theft and smuggling of luxury raw materials and goods (for a further explanation, see Carmona et al., [1997]). For the gunpowder factory, the Gunpowder Ordinances established “usual wastes” in the production process, and the factory manager was accountable for higher wastes [AGI, file Mexico 2216]. By-products of the production process (‘gunpowder powder’) were reused. For the Ávila textile factory there are a few reports on production wastes in 1798, and in the Guadalajara factory materials shrinkage costs were calculated.

The quality of the products was controlled in four factories (textiles in Guadalajara and Ávila, tobacco, and gunpowder). In the tobacco factory a supervisor controlled the quality of the cigars; cigar makers were paid 16 maravedís per properly made batch [Álvarez et al., 2002]. In the gunpowder factory, a quality control network was established involving strict regulations and a system of rewards and sanctions at different levels. The three major stages in the process of gunpowder production (grinding, pasting and corning) could not commence until the main raw materials (saltpeter, sulfur, and carbon) met certain quality standards necessary to guarantee the success of the final product. In some cases, the so-called assays for raw material quality evaluation, which varied according to the different ingredients and intended use of the gunpowder (by the army or by the public), determined that re-processing was necessary. Tests were also made to verify the quality of the finished gunpowder [Núñez, 1999].

For the Ávila textile factory there exists a series of monthly records of machines and workers, classified according to the different productive phases, as well as production data and costs [AGS-SSSH, file 755]. One example is exhibited in Figure 1. The statutes issued by the government for the management of this factory [AGS-SSSH, file 756] required that “all the weavers employed in the factories have to be accounted for in the books, as well as the fabrics that each one weaves and all the different production processes”. Hoskin and Macve [2000] contend that early costing attempts should be differentiated from a modern approach based on human accounting. In Figure 1, however, both machines and weavers are classified by processes. Weavers are also classified by sex and age. Here we see how “Accounting is able to establish new modes of accountability by rendering human activities visible, thereby promoting new areas of dis-course, and enabling social fields to be represented as areas of rational economic action” [Carmona et al., 1997]. Whether the practices of the Ávila factory are the embryo of, or an unsuccessful endeavor at, a shift in focus from machines to men is beyond the scope of this paper.

Figures in reales are followed by “R,” and their remainders, accounted for in maravedís, are followed by “m”. In the two last columns, in the original reales are followed by two points and the remainder in maravedís. Please note that the remainders are not computed on a decimal base.

checked weekly. In Madrid’s liqueur factory the costs of five products were computed for consecutive years with the aim of providing evidence of the progressive decrease of margins for some of the products (see below).

In seven cases, costs were separated for the company’s different areas of activity. In the Ávila and tobacco factories, machines and workers were sorted into different phases of the production process. In the arsenals, monthly reports of the expenses at Eugui and Orbaiceta were elaborated in each fac-tory by the accountant and then endorsed by the managers.

Even though costing was related to inventory control and its inclusion in the companies’ general statements,5 we cannot conclusively reject the possibility that these records were used for internal management purposes, as Hoskin and Macve [2000] might suggest. On the contrary, costing in most cases was related to controls over materials, product quality, waste, cost and labor.

Overhead Allocation: There is evidence to show that the importance of overheads was generally recognized. As Table 2 shows, nine factories took some account of them, of which eight allocated overheads to products. Madrid’s liqueur factory warned that the “wages of the employees are not included” in the calculation of costs. In contrast, in the gunpowder factory, “the wages of the permanent job assistants and employees of the Accounting Office” were included in production cost. Hence, a report contended that the more pounds of gunpowder produced, the less a pound would cost, since administration unit costs decreased [AGI, file Mexico 2228].

In some factories, the costs of several products were calculated and different foundations for overhead allocation were used. For example, as Figure 3 illustrates, Ezcaray’s factory storage costs were allocated to products at seven reales each, while damages and contingencies costs were figured at one and a half percent of production cost. Baling cost and the managers’ and accountants’ wages were allocated at a different rate for each type of fabric depending on its class – allowing higher rates for higher quality fabrics. In the same vein, in the tobacco factory the porters’ cost was allocated to snuff and cigars at 60% and 40% respectively, according to experts’ estimations.

5 The general statements formulated by these companies followed not the double-entry system, but the Venetian style of credits and debits. Hernández Esteve [1996] contends that this was a general practice in 18th century Spain.

FIGURE 3

Source: AGS-SSSH. File 788
Statement of a Cost Study Where Overhead Is Allocated to a Product. Royal Textile Factory of Ezcaray.
Statement of a Cost Study Where Overhead Is Allocated to a Product. Royal Textile Factory of Ezcaray
Costs of each piece of cloth, according to its quality, adding all its transport, wages, selling rights, warehousing, recoveries, and baling expenses; distinguishing qualities and items as demonstrated in the following manner:
First Class Cloth, superfine and “thirty-hundreds”
I assume a liquid cost of fifty-three reales per vara, where each piece usually has thirty-five varas, whose expenses are demonstrated as follows.
For the carriage of one arroba and three cuartillas weight, nine reales each
arroba gives fifteen reales and twenty-five maravedís 15.25
For half the rights, for privileges acquired by royal letter patent, for each
piece of this quality, forty-two reales 42
Stocking in the Clothing Guild, seven reales 7
Baling, forty-five reales every three pieces, fifteen reales 15
Salaries of the accountant and the scribe from Madrid, for each piece of
this quality 30
Damages and eventualities, one and a half percent 27,10
Porters carrying from customs to the store, custody of the bales, and
unbaling, gives two reales each piece 2
Salaries of the director, the accountant, and the scribe of Ezcaray, thirty-six
reales for each piece of this class 36
175.1
The cost that must be added to each piece.

In the Ezcaray textile factory and the gunpowder factory depreciation costs were formally noted. In Ezcaray the impair-ment cost of tools was allocated to different products. In the gunpowder factory the depreciation of boilers “due to the continuous torment of fire” was taken into account [AGI, file Mexico 2228]. For the tobacco factory, payback was calculated for the investment in a new building [Carmona et al., 2002].

Documents also reveal awareness of the importance of fixed costs. It should be noted that royal textile factories faced financial difficulties due to substantial investments, integration of activities before the application of the first inventions decreased costs, high transport costs and lack of skilled workers [La Force, 1965; also Prieto and Larrinaga, 2001]. The correspondence of many textile factories reveals that the impact of fixed costs was cause for concern. The fact that interest on the substantial debts and accountants’ and managers’ high salaries were fixed costs was a matter of a great importance.6 Hence, in the Ezcaray factory, for example, debt was double yearly sales and 16 times the profits the manager claimed to have made. In the textile factory of Segovia “there was little and contingent work and the fixed salaries were 13,200 reales yearly . . . Although the drapery was of superior quality, such a small amount could not have been enough to pay the salaries” [Larruga, 1794: 12, pp. 254-255].

Costing for Decision Making: Although nine of the 13 factories worked out costs and profits, we found evidence of the actual use of these calculations for decision making in only seven cases (see Table 2). Figure 2 exhibits how the textile factory of Ávila computed costs and profits for 79 different fabrics. Other documents for the same factory revealed that these calculations were used to compare the profitability of particular products. For instance, we found a document in which the profits of eight products were compared and calculated as a percentage of cost. In the Madrid liqueur factory, the percentage profit achieved on five products was compared annually and it was revealed that margins were gradually decreasing.

Cost information was used as a basis for pricing, which, given the institutional setting described above, involved negotiations with the economic authorities. The Ezcaray and Guadalajara textile factories had trouble placing their products in the market since their production costs were higher than costs in the English textile industry. Similarly, the gunpowder monopoly used cost as a basis for pricing subcontracted gunpowder. The administrator of Rio Tinto Mines asked for the selling price of copper to be increased since “the sales income was not even enough to cover production costs” [Flores, 1983, p. 78].
As Fleischman and Parker [1991] proposed, cost compari-son was also used to assess the impact of innovations and im-provements. For instance, a careful cost analysis of a new procedure that would allow production to treble was carried out at the tobacco factory, and managers studied a new sieve hung on the ceiling that would allow dispensing with 114 of the factory’s laborers (almost eight percent of the staff) [Gutiérrez, 1999]. In the Rio Tinto Mines, calculations were performed on the cost of recovering rose-like copper in an oven [Flores, 1983, p. 44]. In Guadalajara, cost studies were carried out to assess the impact of a new method introduced by English craft weavers that allowed savings of various materials.

We could find no evidence that cost accounting was used to make decisions about the vertical integration of firms. Even though vertical integration did take place in many sectors, such as textiles and gunpowder, integration in the textile factories was a response to English industrial supremacy as opposed to internal economic rationality [La Force, 1965]. In many cases (such as Ezcaray or Ávila) cost studies in textile factories were aimed at asserting legitimacy by showing their profitability, when, in fact, they depended on the Royal Treasury to cover their operating costs [La Force, 1965].

Standards, Forecasts and Budgets: Five companies used stan-dards for budgeting (see Table 2). The arsenal prepared budgets every four months and sent them to the treasury yearly. The San Fernando factory elaborated periodic budgets for the construction of new buildings. The Ezcaray factory computed standards and prepared budgets on annual operating costs. As Figure 5 illustrates, the gunpowder factory presented a one-month production forecast together with a budget of the costs associated with that production. The tobacco factory extrapolated the production cost of the years 1770 to 1775 in order to predict future costs [Carmona et al., 1997, p. 433].

Five other companies calculated and used standards to control inventory and reduce costs. In the case of Guadalajara, it was possible to find successive regulations containing technical and labor standards and a report about the chances of employee pay cuts [Larruga, 1794]. Other studies were conducted to estimate the savings of materials from implementing new methods. The tobacco factory established standards to improve the production of tin tobacco containers and commissioned an experi-ment to check the production cost. The outcome of the experi-ment set the norms for materials and labor used. If the daily production differed from the standard established in the experiment, then the superintendent was to be informed and that could result in the punishment of the person in charge of the tin workshop.

EARLY COST AND MANAGEMENT ACCOUNTING IN SPAIN, 1760-1800

Fleischman and Parker [1991] and other scholars have re-vised Pollard’s [1965] contention that cost accounting for decision making was not one of the achievements of the British industrial revolution. Fleischman and Parker [1991] argue that in fact between 1760 and 1850 cost accounting practices reveal a substantial degree of sophistication and matched the information needs of entrepreneurs operating in competitive markets and facing narrow profit margins. At first sight, the findings reported in the last section of this paper provide further support for the notion that sophisticated knowledge and actual use of costing techniques existed in Spanish manufacturing in the period of nascent industrialization. For each of the analytical categories proposed by Fleischman and Parker [1991], our percentages in the Spanish survey are comparable to their results. It is really difficult to extract any conclusion from the small differences reveled in Table 2, given the fact that, arguably, the small percentage of surviving business records could bring about larger biases.
Following in-depth analysis, our conclusions on the devel-opment of particular techniques or uses of cost management are also very similar to those obtained by Fleischman and Parker. Costs were routinely controlled in some factories. We found books or cost recording sequences showing that costs were computed on a weekly basis (cigar production and San Fernando), on a monthly basis (Ávila, gunpowder factory and arsenal), and on a yearly basis (liqueur factory). Furthermore, it can be established that in several cases (tobacco, Ávila, Guadalajara and gunpowder) expenses were systematically recorded according to Instrucciones, i.e., governmental regulations on managerial matters. Additionally, we verified a degree of quality control, attention to materials waste, and responsibility accounting.

Regarding overhead allocation, in addition to knowledge of the importance of overheads and fixed costs, it appears that these greatly concerned contemporary analysts because of the financial problems caused by high overheads (the outcome of inefficiency and political considerations). Cost accounting was used for decision making to a similar extent as in Fleischman and Parker’s [1991] sample. Cost accounting was used for pricing decisions and for innovation assessment. Interestingly, cost accounting was not used for vertical integration as in the British industrial revolution. It had different objectives: (i) it was used to rationalize the transfer of leased monopolies (gunpowder) to direct state management (a kind of nationalization); cost studies (like the one presented in Figure 5, which implied the use of standards) were aimed at evaluating the benefits that the new state-owned monopoly could yield to the Crown; (ii) in the case of the textile factories, cost accounting was also used to rationalize and negotiate the support of the Crown, in the form of financial aid, protectionism, or permission for higher prices. Finally, as in the cases examined by Fleischman and Parker [1991], stan-dards for the Spanish manufactures were associated with the aim of controlling costs and the preparation of budgets.

Therefore, our findings fit with the assertion that sophisti-cated cost management was one of the achievements of early industrialization, but not necessarily of an industrial revolution. According to Wilward and Saul [1973], industrialization took place in continental Europe in the 18th century, but an industrial revolution of the British kind, characterized by entrepre-neurship was not present in Spain. Continental and Spanish industrialization was characterized by governmental leadership. Thus, the evidence gathered in this survey casts doubts on the straightforward link between sophisticated cost management and entrepreneurship. Sophisticated cost management could also be a response to bureaucratization, monopolies and governmental intervention.

A number of questions arise from these findings: why did sophisticated cost accounting emerge in Spain in this particular period? Why did it emerge in the different settings of Britain and Spain? Carmona and Donoso [2004] have shown that in Spain standard costing was used for decision making (negotia-tion involving pricing goods in monopolies) as early as the 17th century. Carmona and Gómez [2002] have illustrated that cost control and overhead allocation were present between 1717 and 1744 in the Guadalajara textile factory, operating under medieval guilds in a pure Colbertist context [Vicens Vives, 1987]. We would argue, however, that there seems to be little room for sophisticated cost management in a production system based on guilds. Carmona and Gómez [2002] conclude that cost management at the Royal Textile Factory of Guadalajara had an ad hoc character.

As we explained above, what is singular in the period beginning in 1759, under King Carlos III, is the combination of enlightenment in politics, uniformity and centralization in government, and measures of economic liberalization (free trade and the curtailment of guild regulations). The power of guilds was limited not only by governmental action, but also by the development of new industries such as the cotton mills. This was an era of economic growth and industrialization in Spain that came to an end by 1800 for various reasons, as explained above, but mainly because of the loss of the colonies. Between 1760 and 1800 industrialization was associated with a growing number of larger, complex organizations. The relative scarcity of business records outside this period indicates that industrial activity before 1760 and from 1800 to 1832 had a predominately artisan character [Vicens Vives, 1987].

In accord with the findings reported in the literature and this survey we would hypothesize a common pattern of imple-mentation of sophisticated cost management for the different organizations in Spain. This pattern is based on three features: (i) Carmona and Donoso [2004] and Carmona and Gómez [2002] reveal that there existed some knowledge of cost accounting before 1760. Subsequent sophisticated cost management in Spain appears to be linked to industrialization and to changes in the organization of production brought about by decreases in the power of guilds. (ii) Contrary to conceiving nations as discrete entities, there were substantial commercial and intellectual connections as well as technological transfers, among 18th century European countries. Thus, even though Spain did not lead industrialization, the literature and this survey shows various examples of the import of foreign skilled workers and tech-niques by Spanish manufactures. Arguably, as technology was transferred, cost management knowledge and practices would be transmitted among companies and travel across national boundaries. Several manufactories were run by non-Spaniards, who signed their cost exercises. (iii) Finally, the Crown played a potentially substantial role in the implementation of sophisti-cated costing techniques. In the case of the monopolies, direct state management was possible due to an effective administra-tive system, conducted by a set of trained and competent civil servants. In 1745 administrative functions in the monopolies were separated from auditing functions (performed by accountants) [Artola, 1982]. The accountants were capable bureaucrats. Both managers and accountants had to follow detailed instrucciones that regulated various organizational aspects of the manufactories as well as bookkeeping and costing. Similar experts applied regulations in the textile factories.

CONCLUDING REMARKS

In the last two decades, a body of literature based on the examination of surviving business records rather than instruc-tional literature on accounting, has questioned the assumption that modern cost accounting emerged in the late 19th century. Among others, Fleischman and Parker [1991] have shown that a sophisticated knowledge and use of cost accounting was present in the pioneer companies of the British industrial revolution between 1760 and 1850. Though the theoretical approach and the implications of this body of research are contested by some critical scholars, both proponents and critics alike concede the merit in extending archival research to beyond Anglo-Saxon countries. Hoskin and Macve [2000] have outlined the theoretical and empirical pitfalls of ignoring context.
Applying Fleischman and Parker’s [1991] model to Spain between 1760 and 1800, and examining primary as well as secondary sources, we have shown that a sophisticated knowledge and use of cost accounting also existed in Spain before 1800. While Fleischman and Parker [1991] examined a 90-year period (1760-1850) and we examined a 40-year period (1760-1800), it is significant that the emergence of modern cost accounting is dated at about the same time (1760) in both surveys. And whereas Fleischman and Parker [1991] studied pioneers of the industrial revolution, we surveyed a completely different institutional context, characterized by bureaucratization, monopolies and governmental intervention. Most of our Spanish companies suffered economic failure at the end of the 18th and the beginning of the 19th century.

The study suggests that an important distinction might be made between industrialization and industrial revolution. It could be said that sophisticated cost management was associ-ated with industrialization in both the British and Spanish cases given that this entailed complex organizations and bureaucracies in the second half of the 18th century. However, costing associated with an industrial revolution, with its attendant entre-preneurship and competitive markets, was only present in Britain.

In sum, the evidence reported in this paper supports the view that the causes of cost accounting evolution are complex [Hopwood, 1987]. Sophisticated costing emerged as the cumulative result of economic and political reasons. Some arguments in this survey favor economic causes. For example, in the textile industry which was opened to foreign and national competition, most factories experienced increasing complexity and managers required information for decision making. Even in the case of some monopolies, management accounting was used to maximize the royal income. However, the fact that most factories were closely related to the Crown points to the significance of political factors. The advancement of national industry and attempts to increase international prestige impacted on decision making. Many factories suffered financial troubles and needed legitimacy in order to obtain financial subsidies from the Crown.

It is hoped that the findings of this study will encourage further research in this area. In particular by enlarging the number of companies studied is desirable. Some historians, such as Herr [1958] and Vicens Vives [1987] have identified a larger number of manufactures in this period, though their total is not likely to compare with the number of enterprises in the British industrial revolution. As more work is performed to identify firms with surviving records and more historians become interested in particular companies, wider cross-sectional research may uncover further evidence of cost accounting practices in 18th century Spain. In particular, the Catalonian textile industries deserve a closer inspection.

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APPENDIX 1

Checklist used to Analyze each Case

• Primary sources
• Secondary sources
• Characteristics:
– Sector
– Ownership of company
– Number of workers.
– Is responsibility for cost accounting separated from that for financial accounting?

• Cost control

– Does the company register costs?
– Does it compare costs?
– Does it define responsibility centers? How many? What type?
– Is company ownership separated from management? Geographically?
– Raw materials inventory control
– In-process inventory control
– Semi-finished products inventory control
– Finished goods inventory control
– Is there any quality control?
• Overhead allocation
– Does the company calculate the cost of products? How many?
– Does it separate direct from indirect costs?
– Does it allocate indirect costs?
– Does it use stated criteria to allocate overhead? What criteria?
– Does it separate variable from fixed costs? Does it consider the use of capacity?
– Does it allocate depreciation?

• Use of costs for decision making

– Does the company calculate unit results?
– Does it use information to determine the profitability of different products?
– Does it use data on costs for pricing?
– Does it use data on costs to evaluate processes?
– Does it use information to support vertical integration?
– Is there any feedback about cost information?
– Frequency of cost statements
– The objectives of cost accounting

• Budgets and standards

– Is there any evidence about budgeting?
– Is there any evidence about standards?
– Does it calculate variances from budget?
– Does it calculate variances from standard?
– Is there any evidence about a concern for process improvement through budgeting?
• Motivations to manage costs
– Does the company operate in a competitive market?
– What is the company’s economic and financial situation?
– Is the company under a protectionist policy?

• Accounting Office

– How is the Accounting Office organized?
– Is there any procedure (rule) for bookkeeping?

APPENDIX 2 Units of Measurement Referred to in Figures

Currencies
Real: The Real (or Real de Vellón) was the main Spanish currency unit in
the late 18th century. One Real equalled about 20 United States
cents in 1792 [La Force, 1965].
Peso: One peso equals 8 reales.
Maravedí: One real equals 34 maravedís.
Linear measures
Vara: Ancient Spanish measure that equals 0,835905 meters.
Foot: One vara equals 3 Castilian feet.
Pulgada: One Castilian foot equals 12 pulgadas.
Finger: One Castilian foot equals 16 fingers.
Weight measures
Quintal: One quintal equals 4 arrobas (46,025 kilograms) or 100 pounds. Plural noun ‘quintales’.
Arroba: One arroba equals 11,502 kilograms.
Pound: One arroba equals 25 Castilian pounds. One pound equals 460 grams or 16 ounces.
Ounce: One arroba equals 400 Castilian ounces. One ounce equals 28,7 grams.
Capacity measures
Arroba: The arroba is also a traditional measure of capacity that equals ap-proximately 16,133 liters. Cuartilla: One Arroba equals 4 cuartillas. Cuartillos: One Arroba equals 32 cuartillos.