Relevance Lost: The Rise and Fall of Management Accounting

Thomas Johnson and Robert Kaplan argue that management accounting stopped supplying managers with useful information around 1925 and had not recovered by the time they wrote in 1987. The book combines a history of cost accounting with a critique of contemporary practice.

The historical section is original research. Johnson traces the development of cost systems at the Springfield Armory, the New England textile mills, the railroads, Andrew Carnegie's steel operations, and then the Du Pont and General Motors systems that introduced return on investment as the measure connecting operating decisions to capital. The authors argue that these systems were designed to inform managers, and that they worked.

The break came when external financial reporting requirements grew, and companies stopped maintaining separate systems for management purposes. Cost systems were then designed to value inventory for the balance sheet, which requires allocating overhead to units by some simple measure, usually direct labour. As overhead grew as a share of cost and direct labour shrank, these allocations became severely distorting: high-volume standard products were assigned too much overhead and low-volume complex products too little, which led managers to drop the products that were actually profitable. The authors also attack short-term financial measures for driving decisions that damage long-term position. The proposed remedy, activity-based costing, was developed further by Kaplan afterward. Johnson later repudiated it, arguing in Relevance Regained that better cost measurement was the wrong answer.