Robert Williams
UNIVERSITY OF WOLLONGONG

MANAGEMENT ACCOUNTING PRACTICE AND PRICE CALCULATION AT BOULTON AND WATT’S SOHO FOUNDRY: A LATE 18TH CENTURY EXAMPLE

Abstract: When deciding upon the price to charge for one of their products, the managers of the Soho Foundry in Birmingham placed great reliance upon the data stored in their accounting system. By the last decade of the 18th century, the nature of the steam engine business was changing rapidly and reputation alone was insufficient to attract customers. Also, as more industrialists decided upon steam as a source of power and competition to supply their needs increased, more attention had to be paid to price structures. The increasing standardization of products meant that a price list could be determined. The partners showed some reluctance to come to terms with the pricing issue, insisting that the quality of their product was of more importance than its price. This paper addresses the processes undertaken at the Soho Foundry to establish price lists for engines and parts. It shows that prices were based on the cost of previous machines, this cost being calculated using predetermined rates as shown in the engine books. The paper concludes with the observation that continual reliance on historical data was one of the factors contributing to the firm’s loss of its competitive edge.

INTRODUCTION

The 18 th century in Britain was a time of transition in managerial practices. In the course of half a century, manufac-turing in a number of industries moved from cottages and small workshops to great factories employing hundreds of people [Pollard, 1965]. Change came about as each manufacturing or-

Acknowledgments: The author wishes to thank Richard Fleischman, Warwick Funnell, and several anonymous reviewers for their helpful comments and suggestions on previous versions of this paper.

ganization responded to the challenges and the opportunities offered by new technologies and markets. The entrepreneurs of the time faced administrative as well as technical problems as their businesses evolved. Accounting often assumed new dimensions as it assisted entrepreneurs in coping with and adjusting to change.

In spite of, or perhaps because of, Pollard’s [1965, p. 248] claim that cost accounting played an insignificant role in managerial decision making during the Industrial Revolution, there has developed a growing body of literature about the management accounting practices employed by the newly emerging businesses as each developed an accounting that suited its particular needs. Chatfield [1977, p. 101] tended to support Pollard’s limited view of cost accounting when he asserted that a major use for cost data was to assist and moderate price estimates given by engineering firms. Certainly this was an important use of cost information, but it was by no means the only one. It is certainly a view not held by Robert Hamilton, the author of An Introduction to Merchandize, published in 1777 [see Mepham, 1988a,b for a discussion of this text]. According to Mepham, in addition to discussing practical costing techniques, Hamilton emphasized the use of cost to assist managerial efficiency [Mepham, 1988b, p. 55].

Since Pollard, there have been a number of studies which have lent support for a wider view of the involvement of ac-counting as a managerial tool during the Industrial Revolution in Britain. For example, McKendrick [1970] discussed Josiah Wedgwood’s use of cost information by highlighting an incident where the calculation of costs by Wedgwood served as a check on the profits reported by the firm’s bookkeeper. Wedgwood also used cost data to moderate prices during periods when trade was slack.

Edwards [1989] reviewed cost accounting developments in Britain to 1830 and concluded that a wide range of managerial decisions were supported by accounting data, a conclusion also reached by Fleischman and Parker [1990, 1991, 1992, 1997] in their investigations of the use of cost data for managerial purposes over a number of firms. Their 1991 article reported a survey of costing practices in 25 firms active during this period in which they found significant use of cost techniques as an aid to management. On the level of an individual firm, Fleischman et al. [1995] examined in some detail the cost investigations of James Watt jnr in the negotiation of a piece rate for the moulders at Boulton and Watt’s (B&W hereafter) Soho Foundry in 1802. This incident was also referred to by Williams [1994] in a discussion of the character of James Watt jnr.

Further evidence of the wider use of management accounting can be found in Walsh and Stewart’s [1992] examination of the management accounting used by Robert Owen at his New Lanark (Scotland) cotton mill during the first part of the 19th century. They concluded that Owen had given accounting a role in the transformation of his workers from contractors to employees.

Other examples of this expanding literature are to be found in Edwards and Baber [1979] with their discussion of cost accounting at the Dowlais Iron Company, Stone’s [1973] description of the Chorlton Mills of Manchester, Beckett’s [1977] case study of a factory in the 1740s, and Jones’ [1985] extensive discussion of the use of cost accounting in Wales in the 18th century. A number of other articles explored different facets of the active use of management accounting during this period, adding to the weight of evidence refuting Pollard’s view [see, for example, Edwards and Newell, 1991; Edwards and Boyns, 1992; Fleischman and Tyson, 1993; Williams, 1997; Fleischman and Tyson, 1998].

This paper is concerned with the accounting activities of the B&W organization at Birmingham, a firm which is well known for its efficient operation [see, for example, Roll, 1930; Pollard, 1965; Fleischman and Parker, 1991; Fleischman, 1993; Williams, 1994, 1997; Fleischman et al., 1995]. This paper aims to add to the literature by exploring in depth one aspect of B&W’s use of cost data, specifically its use of past costs in the development of a pricing policy for steam engines in the late 18th and early 19th centuries. It will also demonstrate the firm’s reliance on this information in order to remain competitive in the face of an expanding market. The paper also adds to the work of Roll [1930] by providing detail of the material used by B&W in the development of its price list.
This paper adopts a microhistorical approach to the study of the development of B&W’s prices because it is concerned with the actions and the thoughts of the individual actors. The term “microhistory” encompasses the study of an incident or individual in-depth rather than a group of people or an aggregation of events [for a further discussion of the term see Ginzburg, 1980, 1993]. It is not suggested that the process of price development used by B&W was typical of manufacturers in general. The study of the practice of accounting in a particular situation, however, does lead to a greater understanding of accounting in its wider context. There is a danger when concentrating at a microlevel of obscuring the wider issues. A microhistory approach to the study of business practices in 18th century Britain, when there appeared to have been no standard management accounting practices, can do much to broaden our understanding, as each firm devised its own ac-counting information system in accordance with the precepts and views of its proprietor(s). Sharpe [1990, p. 35] points out how:

. . . once a grasp of the society in question has been established, the isolated social event or individual . . . can be used to provide a pathway to a deeper under-standing of that society.

Microhistory allows us to explore the reaction of individu-als to the discipline imposed by the practice of accounting. The comprehensiveness of the cost data accumulated at the Soho Foundry has been mentioned by Roll [1930], Pollard [1965], and others as being well in advance of other firms. However, this assertion is based on existing, limited archival evidence. It may be that other firms may have used similar systems. Nevertheless, an understanding of the solutions B&W developed in response to its competitive environment provides an interesting study on its own. The series of documents described in the latter part of this paper illustrates a progression in corporate reasoning as the partners attempted to position their firm in an increasingly competitive market.

The manufacture of steam engines in the closing decades of the 18th century was a highly competitive business. B&W had to contend with other manufacturers who either pirated their design [Tann, 1980] or who made the older Newcomen engine which, although not as efficient as Watt’s design, was feasible where coal was readily available [Hills, 1993]. Expanding cotton manufacture and its demand for power stimulated the market for steam engines. The impending expiration of Watt’s patent in 1800 also stimulated interest in the market by potential manufacturers who were aware of the demand for these machines [see, for example, Briggs, 1982; Hills, 1993]. Even though the B&W organization tended to compete on quality

1The Birmingham Central Library holds the exceptionally well preserved and very extensive Boulton and Watt archive. In all of the examples, original spelling and formating have been maintained as far as possible.

and reputation2 rather than price, it was concerned with the competition and did pay attention to costs when working up a price for a potential customer. It is the aim of this paper to examine the calculations undertaken in the process of price determination at B&W’s Soho Foundry, a purpose-built, steam engine factory.
The first part of the paper provides a brief discussion of the B&W firm and the events that led to the establishment of the Soho Foundry. The second part of the paper describes the deliberations of the partners as they were confronted with the need to establish a standard price list. The discussion illustrates their use of cost information in this process.

THE STEAM ENGINE BUSINESS

The original partnership of B&W, formed in 1775, was es-tablished to act as consulting engineers in the erection of steam engines designed by James Watt [Roll, 1930; Dickinson, 1935; Tann, 1981; Law, 1990]. The steam engine developed by James Watt3 was more efficient and economical than the other engines then available [Roll, 1930; Dickinson, 1935; Law, 1990]. Initially the partnership supplied drawings of an engine and supervised its construction. Most of the parts of these custom-built engines were made by subcontractors who bore a large part of the risk. Matthew Boulton4 and James Watt selected appropriate specialists for particular pieces, more on the basis of the quality of their work than cost, because of a concern for the firm’s reputation [Tann, 1981]. However, as time went by, in order to maintain the high quality of the product, more and more parts were made in Boulton’s Soho Manufactory. By the early 1790s, over 50% of the value of the engines was made by the partners [Tann, 1981]. The nature of the business was

2In a letter to John Southern dated April 24, 1799, James Watt jnr wrote “… it is not our wish to vie with others in lowness of estimates, but in goodness of workmanship, being well convinced by long experience that the best Engines are the cheapest in the end” [B&W 33/5].

3James Watt (1736-1819) was born in Greenock, Scotland. He developed improvements to the steam engines then in use by using steam to exert a positive force on the piston and condensing the steam outside the cylinder. These improvements were patented in 1769, with the patent being extended in 1775. Watt formed the partnership with Boulton to exploit these ideas.

4 Matthew Boulton (1728-1809) was an established manufacturer of buckles and other metal ornaments in Birmingham, England. His manufactory was established at Soho, just outside Birmingham.

changing as well, with customers being more interested in pur-chasing a complete engine rather than being bothered with the close involvement in its construction that had been necessary to this point [Dickinson, 1936]. Other incentives that inclined the partners towards manufacture in their own right included the attraction of a greater share of the profits, which hitherto had been taken by the external subcontractors. Even though these subcontractors were selected because of their ability, they were not solely concerned with the manufacture of steam engine parts which led to problems with quality control as well as a lack of standardization5 between subcontractors. This, together with the difficulties involved in coordinating the subcontractors, encouraged the partners’ new direction [Tann, 1981].

By late 1794, B&W had come to the view that it would have to manufacture complete steam engines and not depend on subcontractors. In October a new partnership under the name of Boulton, Watt & Sons was formed to manufacture steam engines at a new foundry in Birmingham [Roll, 1930; Dickinson, 1935; Tann, 1981]. The partners were Matthew Boulton, and his son Matthew6, James Watt, and his sons James jnr 7 and Gregory8.

SOHO FOUNDRY

The Soho Foundry was intended from the outset to be run as a separate business by Matthew Robinson Boulton, James Watt jnr, and Gregory Watt. Construction began in 1795 and was completed in the next year [Roll, 1930; Dickinson, 1935; Gale, 1962; Tann, 1981]. The Foundry was designed to manu-facture complete engines and was unique in that, unlike other factories at the time which produced a varied number of prod-ucts, its sole purpose was the manufacture of steam engines [Roll, 1930; Gale, 1962]. The new factory did not replace

5Most of the engine cylinders were made at the Wilkinsons’ Bersham Iron-works, but an argument between the partners John and William Wilkinson and the resultant closure of the works ended this source of supply. Cylinders cast and bored by the Coalbrookdale Company were reasonably satisfactory, but this firm was unable to meet the demand. Cylinders produced elsewhere were unsatisfactory [Rolt, 1962].

Boulton’s Soho Manufactory which continued to assemble en-gines and make parts for a number of years.

In its first year of operation, the Soho Foundry accepted orders for 31 engines and by 1800 had produced 169 [Tann, 1981]. Matthew Robinson Boulton seems to have been very much involved in the initial planning for the Foundry, while James Watt jnr, judging from the amount of calculations and costings in his handwriting, seems to have been more con-cerned with managing daily operations [Dickinson, 1936].

The Soho Foundry had three main operating departments. The Foundry Department cast engine parts, the Smithy Department manufactured parts from wrought iron, and the Fitting Department machined the parts and fitted the engine together. Each of these departments was treated as a profit center. The products of both the Foundry and the Manufactory were sold by one organization, but the records distinguish between the products of each. The Soho Foundry was operated as an independent entity and was expected to make a profit, as were each of its operating departments.

PRICES

Originally, the older Watt and Boulton charged a yearly premium for their engines rather than a straightforward price because they supplied the knowledge to build the engine rather than the individual parts [Tann, 1981; Hills, 1993]. When first introduced, the premium was equal to one-third of the savings in coal usage which resulted from the more efficient B&W engine compared to the older atmospheric steam engine [Tann, 1981]. This was an ingenious and profitable procedure as the partners tended to sell the majority of their engines to the mines in Cornwall where coal was very expensive and the savings due to the Watt engine considerable. As the organization supplied more and more engine parts, it charged for those parts supplied. The yearly premium or royalty was based on the actual number of strokes made by the engine as measured by a counter designed by Watt9 [Rolt, 1962; Tann, 1981]. Eventually

9Watt snr carried out a number of experiments to determine the relative efficiency of various sizes of engines and developed a calculation to enable him to determine the premium payable on any one engine. To decide the actual premium in any one year, it was necessary to determine the amount of work done, so he invented a device to count the strokes of the engine [Dickenson, 1935; Rolt, 1962]. Eventually, the premium was calculated by using a formula based on horsepower [Fleischman and Parker, 1992].

the royalty became fixed at £5 per horsepower per year for rotative10 engines used outside London and £6 for engines used in London [Jones, 1973; Tann, 1981; Fleischman and Parker, 1992].

By the 1790s, engine purchasers were given the opportunity to commute the premium by discounting it to a lump sum. According to Tann [1981], the majority of new purchasers accepted this offer. A letter to Watt jnr from John Southern [B&W 19/6] shows an example of the calculation for the commutation of a premium. By the time the organization was supplying the whole engine and steam engines had become a commodity, it was obvious that the pricing system was inadequate. Roll [1930, p. 312] quoted a table titled “Prices for Rotative Engines” which he believed relates to August 1795. This table shows a comparison of the amount the firm could expect from a number of different-sized engines based on parts supplied plus the premium over five years compared to a fixed price based on the cost of the engine plus a markup of 50%. The amounts calculated by the two methods were very similar, so a change to a set price would not reduce profitability and would reduce the work required to collect the premium.

Need for Change: Determining the price to charge seems to have been a continual problem to Watt jnr and Matthew Robinson Boulton. Increasing competition, from manufacturers such as Matthew Murray and Richard Trevithick [Hills, 1993], coupled with the fact that the annual premium was never popular with the customers, meant the partners had to pay strict attention to pricing. It was no longer sufficient to trade on quality alone. The change from charging a premium based on usage to a set price required a change in methods of calculation. To this end, engine cost became the basis for price calculation.
There was a common pricing structure for the engines built by B&W, whether they were built at Soho Foundry or assembled at the Soho Manufactory. The prices charged did not include transport, which was paid by the purchaser. After testing, the engines were disassembled for transportation and usually shipped by canal barge.

The considerable correspondence and price calculations still existing are an indication of the partners’ concern for prices. The first word came from the elder James Watt in a letter to Matthew Robinson Boulton:
Soho June 1st 1796 Mr M. R. Boulton

Dear Sir

As your father & myself considering the general sub-ject of premiums it appeared to us that they might with propriety be charged as follows taking Mr Southern’s11 estimate of 12 horse engine for an example

neat cost materials £308
manufacturing profit 20 pr% 68
Premium 50 pr Ct on neat cost 154
Boiler 60
10 pr% on Do 6
£596
or if you think that is too little
materials & 20 pr% 376
premium 50 pr% 188
Boiler + 10 pr cent 66
£630

We think that we have no title to 50 pr % on boilers not being made by ourselves, there is little besides the risk of bad debts – however we wish to leave the whole open till we are all at home, & I think it cannot be satisfactorily settled till there is a view of this years transactions & profit, at present it is better to ask something too much than too little.

Small engines should pay a greater percentage than larger ones, otherwise will be attended with loss, as requiring so much trouble, we should look now to the conclusion of the patent & when all settle prices settle also what we can probably work for when that is re-quired.

11John Southern (1758-1815) joined B&W as an assistant draughtsman in 1782 and remained with the firm until his death in 1815. He was a trusted and valued friend and employee and he was admitted as a partner in 1810. Southern is reputed to have invented a device for measuring changing cylinder pressures in 1796 [Roll, 1930; Dickinson, 1935; Rolt, 1962].

I have no news since my last & remain Dear Sir

While having an appreciation of the direct cost of manufac-ture, the letter indicates that Watt was unsure about indirect costs with the markups of 50% on cost as well as an allowance for manufacturing profit. The “neat cost materials” referred to the cost of the various engine parts which included material plus direct labor [as detailed in the Engine Books B&W 231]. The alternative calculations provide an interesting comparison by allowing a markup on the profit already added to the cost.

Each of the operating departments at the Soho Foundry was expected to make a profit. The transfer price from each department included a markup to which the organization added another allowance for profit to the accumulated cost. Pollard [1963] suggested that this practice had its origins in the traditional practice of subcontracting with each department treated as if it were an independent unit. This relationship was illustrated in the discussions leading to the fixing of piece rates for the moulders described in Fleischman et al. [1995] and Williams [1994]. Whatever its origin, this practice was an efficient way of managing the operation with responsibility for profitable operation being given to the managers. Documents from MPB 285/28 [quoted in Williams, 1997, p. 177] show a comparative profit and loss account for the Smithy, Foundry and Fitting Departments for the Soho Foundry for 1798. The Smithy made a loss while the other two departments made gains.

The steam engine business was very profitable for the firm, and prices it charged were considered by some higher than perhaps they should have been. The young partners were obviously sensitive to this public opinion as the following extract in a letter from Watt jnr to M. R. Boulton (July 10, 1798) shows [B&W E7]:

. . . opposition we experienced from Murray12 at Leeds, that attempted by Hawkes here & the report generally

Matthew Murray manufactured engines in Leeds. Boulton and Watt had suspicions that Murray had infringed the patent but took no action against him until after prevalent & generally accredited of the enormity of our profits upon Rotative Engines [emphasis added], make me think seriously that we ought at an early period, perhaps at the close of our books in Sepr to adopt a new Tarif of Prices. If the present premium on Rotatives were reduced to 30 per %, we might keep it at that rate for a few months & then reduce it farther if judged eligible. It should also be an object of consider-ation, whether the Londoners should not be put upon the same footing with their neighbours in the Country. Perhaps 25 per % might be advisable for Colliery En-gines, in order still to keep up some distinction between them & others as arising from the very great difference of the value of savings. It will be prudent in us whilst we yet may, to secure the trade in our own hands, by removing in part the incitement to rivalship & bringing matters to that state, in which we can still carry on the business with a reasonable profit after the expiration of the patent.

The move to lower the prices was caused by a desire to reduce potential competition. This is reinforced by Watt’s com-ment about colliery engines. Collieries had the advantage of cheap coal which made the less efficient but cheaper atmo-spheric engines more cost effective and a viable alternative to the B&W product. The letter implies a reluctance by Watt jnr to let go of the “enormity of our profits on Rotative Engines,” with an almost fatalistic acceptance that the good times were drawing to a close, requiring the firm to bow to the inevitable lowering of prices and profits.

Development of a Price List: By 1798, 14 engine sizes were of-fered to the market [Roll, 1930]. Each was customized to the requirements of the customer but was assembled from standard components, allowing a standard price to be set. Whether to charge a different price to customers in London was a question the firm struggled to answer and one that was unresolved for some time.

James Watt jnr proposed a differential price structure in a letter to Boulton jnr several months later [MBP 353/61]:

rses Country London Addl
Boiler
4 £350 £366 £32
6 379 398 38
8 473 497 45
10 523 548 60
12 560 588 68
16 727 763 90
20 800 840 110
24 1040 1092 132
30 1120 1176 160
32 1156 1214 172
M R Boulton
Scarborough
Soho 11 Sepr1798

Above you have a synopsis of the new Estimates. They may reckoned to take place in all Engines sent from hence after the end of the present Month.
In framing these, the old estimates have been left quite out of the question & we have proceeded upon what appeared to be the real costs by Foreman’s books [emphasis added13]. These we have determined by taking out all those of a size that have been made since the prices were raised & the steam cases added; we have then deduced an average cost and added about 5 per % to cover deficiencies & to provide for trifling additions either in the way of improvements or extraordinary size of Rotative Shaft & c. The Boilers have been taken as they stand charged in Foreman’s books (where a profit of 16 per % is already laid on by the Manufactory, which considering the little trouble we have with them is enough on that score) and their average amount has been added to the sum obtained as above for metal materials. This has been assumed as the full cost & to it has been added 33 per % for the country prices & 40 per % for London.
An example will make this more clear.

The Average Cost of the MM of a 4 Horse Eng. £220
5 per % about £ 10
Foreman’s charge for Boiler 32
Total manufacturing cost £262
Country premium 33 per % 88
New Country Price £350

If the boiler is not to be furnished by us you deduct its cost as stated in the fourth column & we remain in proportion of the percentage charged for Premium. This appeared the simplest mode of proceeding – The London prices have been calculated at 40 per cent. It was thought advisable not to bring them down at once to the country prices, but to lessen the disparity gradually; the one is therefore reduced 17 & the other 23 per % –

Perhaps upon comparing these with the old prices, you may not think we have taken off enough; neither do I. But it may be well to go to work gradually, to try these for half a year & then perhaps to come down to 25 per % on the Country & 33 on the [London]

I have also to add, that Southern otherwise engaged, these estimates have been taken somewhat grossly and will admit of revisions and corrections when we are all together. For the present, they are on the safe side.

These prices were based on costs in the Manufactory, but applied to those engines produced by the Foundry as well. The term MM refers to metal materials; i.e., the cost of the various parts and the assembly of the engine. Watt’s calculations show some inaccuracies, which is rather surprising for one who was usually very meticulous.

The partners showed further concern with public opinion as well as the effects of increasing competition. Boulton & Watt engines enjoyed a considerable reputation for quality, but they were expensive. There were other manufacturers in the market, who, the partners felt, did not offer products comparable in quality, but whose engines nevertheless met most of the customers’ needs at a lower price.14 The cotton manufacturers, a major group of potential buyers, were interested in value for money and were prepared to seek alternative solutions to their power problems. Consequently, the firm had to contend with water power as well as other engine makers.

Matthew Robinson Boulton reiterated the concern with public opinion when he wrote to James Watt jnr, who was in London (December 18, 1798), that he would:
14Von Tunzelman [1978, p. 54] presented a comparison of steam engine prices which indicated that B&W were considerably more expensive for larger size engines; e.g., in 1804 they charged £1,083 for a 20-hp. engine whereas Fenton, Murray & Wood charged £600 and Goodrich £750. For engines up to 10 hp., B&W appear to have been competitive.

… if possible get an estimate [of brass air pumps] & forwarded by this evening’s coach & shall accompany it with a new list of prices of Engines – we find that considerable embarassment will ensue unless the re-duction of our estimates is made very gradually the whole reduction proposed to take place before March 21st 1799 viz from 45 pr% to 33 on London & frm 33 to 25 pr% on country we think should be effected by monthly deductions – without this precaution we shall have much difficulty in stearing clear of Disputes upon this subject & certainly not succeed in accomplishing the alteration witht exciting public attention. . .

A second letter to Watt, written later that day, lists the proposed prices with the further proviso that the premium be reduced on a monthly basis and stresses the need for gradual reductions, perhaps hoping that no one would notice. He wrote:

I send you herewith the prices referred to in my letter of this morning & we propose them for the ensuing month to be stated at one pr % less or at 34 & 28 pr % upon metal Maters & similar reductions to take place monthly till we arrive at the permanent standard – Perhaps it may be judged expedient to make a larger deduction from the London prices in order to bring them sooner to the same standard as the country. From your recent transactions with the Londoners you will be enabled to judge whether this distinction has or is likely to create any disatisfaction & of course to decide upon the propriety of extinguishing it more rapidly . . .

Watt jnr’s reply came from London a few days later when he expressed some disquiet over the price reductions. He re-sponded that he could not:
. . . help thinking that the proposed monthly reduction will be troublesome & create some confusion with re-spect to orders transmitted by Lawson, or any other itinerant agent. The further reduction to be made at 4 pr % in one instance & 10 in the other is so small, that I do not fear its having the effect you apprehend, more especially as the last very considerable reduction was not attended with such consequences & appears indeed to have escaped observation. I should either propose to continue the estimates you now give, for six months, & then take 4 pr % from the Country & 5 pr % from the London price. The remaining 5 might remain upon the London Engines until this time twelvemonths. I pre-sume you have not yet made new Estimates, nor do I think you can, until several Engines have been made with the proposed alterations, which I hope you are now carrying into effect. They will add to the price considerably, unless deductions can be effected in other matters . . .

The problem seems to have been to find a way to make the inevitable price reductions unobtrusively. Watt’s last comment sounded a note of caution by suggesting that cost cutting might become an issue as new changes were made to the engines they had on offer.

Four months later, on the eve of the expiration of the en-gine patent, the issues of the firm’s image, its prices, and its competitive environment were highlighted by Watt jnr in a let-ter to John Southern (April 24, 1799) when he wrote:

I think the estimates you propose sending to Mr Tewsbury very proper, and I also think it very right that the topics you state should be urged at some length, particularly that our prices now, comprehended nothing but a manufacturing profit & will not be effected by the expiration of our exclusive privilege. That it is not our wish to vie with others in lowness of estimates, but in goodness of workmanship, being well connvinced by long experience that the best Engines are the cheapest in the end. . . .

Even though the generally held view was that B&W engines were the best available, Watt jnr was well aware that many potential customers were prepared to compromise quality if substantial cost savings were to be made. Watt held a very short-term view because engines using high pressure steam would soon become available and offer greater output for lower overall cost [Hills, 1993]. The B&W engines, while strongly built, did not change with advancing technology.
Use of Cost Information: In attempts to set a price for the different sizes of engines, Watt continually referred to the cost of engines already built as they were listed in the engine book rather than base cost on a “standard” engine for each capacity. The engine books are large books consisting of a printed list of all the parts required by a particular engine under the headings “Cast Iron,” “Wrought Iron,” “Brass,” “Miscellaneous,” and “Fit-ting.” The list is very detailed and as there were slight differ-ences between engines, the detailed list of parts for a particular customer could be specified. When working up a cost for a particular engine, standard rates were used for the different parts. These standard rates seem to have been determined as a result of negotiations with employees and did not result from an imposed standard [see Williams, 1994; Fleischman et al., 1995 for a discussion of this process in relation to the Foundry Department]. The standard rates appear to have been constant for a number of years. Comparisons between the “standard” cost of an engine and actual costs were made elsewhere; yet, the engine book data were used for price development. There appears to have been no attempt to use actual cost, even though actual cost was available, nor is there any explanation for this procedure.

The costs used in the following calculations come from the engine books. These two examples are taken from a document entitled “Calculations for new Estimates 4th June 1801” and illustrate the calculation of price based on past cost. The docu-ment, in Watt jnr’s handwriting, includes calculations for eight different size engines:

Example 1:
4 Horse
18 Novr 1800 Bryson & son add Cisterns for feed Apps } & hot water ] Additional price of Boiler } 2/- pr Cwt on 13 Cwt ] 267 2 1 ,, 6
25 pr % 270 67 ,, 6 „ 11
£ 337 „ 17
But as a greater proportional profit should be laid on these small Engines to Compensate for the trouble of drawings &c it may stand in the Provisional Ests at £350.
[B&W 7/VI/14]

At this time 4-horse engines were not very common, and it was felt that a small engine might create extra cost in its design and assembly. Indeed, the elder Watt had made this very point in his letter of 1796, quoted above:

Example 2:
14 Horse
1800
20 Aug Rigby & Chadwick 500. 4. 4
Deduct for Crank Fly Wheels }
£30 }
do Extra size of Br 10 } 40
——£460. 4
10 Decr Huddart & Co 489. 16
Deduct for Crank & fly wheels
30
Do for stop pipe 5. 5 35. 5
——£454.11
1801
21 Jany Hibbert & Smethurst 486.4
deduct for Dbl Crank Motion 21
Stop pipe & bonnet 5.4 25. 4
——461

3|1375. 15
458. 11
2
3. 6
463. 17
114. 19
Add for Cisterns
Addl for Boiler 33cwt at 2/-
25 pr %
£578. 16 Call it £600 as before
[B&W 7/VI/14]

The second example shows the calculation of a base cost for these three engines by removing from the calculation the cost of unique parts by taking an average, adding the cost of additional items, and then adding a markup. The standard costs for each individual engine manufactured were recorded in the Engine Books. As an example of the origin of the costs used in the price calculations, the Engine Book for February 1800 -February 1802 [B&W 232] lists the costs (summary) for the Rigby & Chadwick engine mentioned above as:

1/2

Cwt Qrs Lbs £ S D
Cast Iron 192 2 5 210 17 1
Wrought Iron 16 1 11 73 7 11
Copper Brass &c 4 2 4 53 2 1
Boiler 35 25 73 19 472
Stores 5 8 6
Patterns 19 7
Carriage 4 17
Fitting 59 5 4
500 41/2 4

The price calculations, and there are many still in existence, all show the same attention to detail with succeeding price calculations being based on the average engine book cost of previous engines of the same size.

As time went by, the products the firm offered became more standardized; yet, reference to past cost was continually made in the calculation of the price of engines. The markup eventually declined to 25%, and then to 20%, with no extra premium for London.

Monitoring Price: As successful businessmen, the partners were obviously concerned to make sure that costs were covered and a profit made. Watt jnr monitored costs and prices to ensure that this continued to be the case. For example, a document entitled “List of Engine Materials and Premiums from 30th Septr 1798 to Do 1799” [B&W MII/7/2] compares the price with the actual cost of all the engines built by both the Foundry and the Manufactory during that period. Differences between the actual profit and the computed profit based on a percentage applied to engine book or “standard” cost were calculated and the differences noted. In all cases a reasonable profit was made; however, overall actual profit was lower than the expected profit. This particular document makes no attempt to explain the reason for the differences. However, the document reflects a sophisticated awareness of the use of accounting data as a control tool. Perhaps complete correspondence between estimates and actuals was an unreachable ideal because of the problems of estimating overhead. Nevertheless, managerment spent a considerable effort in refining its attempts.

Price of Engine Parts: Price calculations were not limited to the price of whole engines because a comprehensive list of prices for individual spare parts was built up. Generally these prices were based on the standard or engine book rates for making that part plus a markup of 20 – 25% [B&W 7/IV]. In order to calculate new prices, reference was continually made to the cost of parts made previously. The comprehensiveness of this process is illustrated in a document relating to the calculation of the cost of a cast-iron beam rather than a wooden beam for a 40-horse engine in 1802. There appears to have been an inquiry as to the extra cost, a cast-iron beam having technical advantages over a wooden one:

Beam Extra Materials A & G Murray March 1802
Cast Iron Beam 56. 1.16 20/- 56. 17. 10
Turning & fitting Do 9.12
Part expence of pattern 6.12. 6
2 Wrot Iron Cutters for Caps 1. 14. 272
16 Steel wedges 11. 1 1.15. 372
Blacking & weighing 1
£ 75. 17. 772
Calculation of the difference between a Cast Iron Beam & a Wooden Beam for a 40 Horse
Materials of Cast Iron Beam as above 75. 17. 7V2
Main Gudgeon 5. 11. 21
Outer end Do 1. 13. 22
Inner end Do 1. 13. 24 cwt
Caps for Do 1. 12. 16 say 11 at 20/- 111
Boring & Turning Gudgeons & Caps 6. 16
Do Main Gudgeon 17. 16
Part Expence of patterns 1. 13. 16
£ 94. 14. 17
The following are from Messrs Wormauld & Cos Wooden Beam – charged at the present prices – 1802
cwt
Main Gudgeon 4. 10. 110

84 Accounting Historians Journal, December 1999
Saddle plate & Glands for intr extd 1. 3.
Gland for Centre of Beam 3. 0. 1
Sad & Plate & Glands for outer end 1. 1. 16
10. 0. 17 @ 20/- 10. 13. 10 7 Pins & Nuts inner and back end
4. 8. 1
5. 19. 7
12. 10
5. 2. 8
2. 7. 0
12. 6
1 . 1
10 ig
30. 16. 8
£ 63. 17. IIV2
15. 3.
79. 10.
[B&W 7/IV/60]
saddle plates 151 at 7d
2 Beam Straps Nuts &c 205 at 7d
Wrought Iron Gland for
back end of motion 22 at 7
end of beam 176 at 7d
Turned pin for outer end saddle plate 47 Turning Centre Gudgeon Patterns Weighing blacking &
Difference of Cost

Note that the difference in cost includes the markup of 25% rounded down to achieve an even value, a common practice. This customer would then have been asked to pay an extra £79 to have a cast-iron beam fitted instead of a wooden one. It should be noted that there was no allowance for timber in the calculation of the price of the wooden beam because it was usual for the customer to supply the beam and the firm to supply the appropriate fittings.

The document continues with the calculation of other parts based on “extracts from the printed Daybook. …” The stand-ard costs of past work were used in many calculations and estimates relating to future work. The record of past costs formed an important database to be used in the calculation of all prices.

CONCLUSION

The Soho Foundry was a new venture, designed from its inception to build steam engines. Consequently, the factory was built to ensure smooth and efficient working. The factory that was built and staffed with dedicated, highly skilled, and innova-tive people operated for many years. The Soho Foundry was designed to operate in the same way as its products. As a steam engine was designed to produce power, so too was the factory designed to produce steam engines smoothly and efficiently. As steam engines were designed to be self-governing, so too the factory, with accounting providing an essential part of this governance.

The accounting system was set up to reflect the organiza-tion of production. It was designed around profit centers and recorded the flow of materials and work from one department to another. Product was transferred using predetermined transfer prices. Because the Soho Foundry was a pioneering venture, it is important not to judge workable solutions found to the problems that arose in the light of present knowledge and practice because of the differing contexts. The accounting processes extant at the Soho Foundry in its early years continued for many years, so it is reasonable to assume that they supplied the perceived needs of that time. Certainly the existing number of documents showing calculations still indicates that the accounting system provided a database that was used by Watt in the managerial process. Yet, it does not appear to have been used to produce budgets or other forecasts.

In price calculations no reference was made to the prices charged by the competition. All calculations were based on previous engine-book cost. B&W engines were in a unique situation, having been the first to use a condenser, leading to greater efficiency and cost saving. Because of this uniqueness, the firm traded on its reputation for quality but pursued with equal vigor those firms that pirated their designs and tried to undercut their prices [Roll, 1930; Tann, 1980]. However, the impending ending of their patent in 1800 and the subsequent expected expansion in competition forced its attention to the pricing structure. The letters of the partners show their concern with public opinion, yet imply a reluctance to engage their competitors. Their celebration of their reputation for quality and continual reliance on historical data failed to encourage risk taking, and the firm soon lost its innovative edge. Compound and high-pressure steam engines gradually captured a greater share of the market [Law, 1990; Hills, 1993].

Cost accumulation was an important activity and was a basis for further activity. Costs were used as a basis for prices and as a check on profitability. As the above examples show, prior costs were referenced when preparing quotations for the supply of engines and the development of a standard price list. They were also referred to when working out prices for non-standard engines or parts. Accounting information was crucial in establishing a base line for these calculations. The accumulated facts of the past then became a basis for the actions of the future.

REFERENCES

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SPRING 1999
Accounting and Business Research

Volume 29 Number 2 Spring 1999
Contents
Articles
The market reaction to auditor resignations John Dunn David Hillier Andrew P. Marshall 95
Discretionary write-downs, write-offs, and other restructuring provisions: a signalling approach Pascal Frantz 109
The revaluation of assets as a signalling device: a theoretical and an empirical analysis Ann Gaeremynck Reinhilde Veugelers 123
Board composition, ownership structure and hostile takeovers: some UK evidence Noel O’Sullivan 141
The economics of Accounting for Growth Rhoda Pierce-Brown Tony Steele 159
Book Reviews
Daijiro Fujimura, A lost accounting system and its significance for classical capitalism: The double account system at Schneider & Company in the mid-nineteenth century J. R. Edwards 176