Work-Standard Accounting Practices: Managerial Cost Accounting

Many of the economic and financial indicators that Neoliberalism still employs in the early 21st century were developed throughout the early 20th century. The Great Depression and two World Wars, of which the Cold War was the extension of the second, forced Liberal Capitalists to rethink how they applied their ideology worldwide. Some of the most significant innovations included refinements to the Double-Entry Account Bookkeeping and the Fractional-Reserve Banking System. The modernization of the Financial Market and the rise of the Manufacturing Sector encouraged the need to implement a standardized accounting system designed to relay information about economic performance and financial solvency. The Accounting Profession became integral to collecting the necessary financial data and conveying it to investors and privatized commercial banks alike.

At least, that is how things are supposed to be envisaged in the English-speaking world. In the German-speaking world, however, the Accounting Profession developed differently from its English counterparts. One notable explanation is that the German Accounting Profession itself emerged as an outgrowth of Socialism’s direct antecedent, Cameralism. The Accounting Profession in the German-speaking world was understood to be an official function of the State as opposed to the national economy. It was not until the turn of the 20th century that the German Accounting Profession was reapplying itself to economic life. Two notable developments involved the introductions of “Managerial Cost Accounting” and “Inflation Accounting,” both of which were shaped by the experiences of the German-speaking world throughout the early 20th century.  The accounting practices described may be suitable for State Capitalism, but not for the Work-Standard’s own accounting practices.

Inflation Accounting

While the concept of Currency Depreciation/Appreciation is hardly new, it acquired newfound significance in the First World War and in the later interwar years. Due to the Allied and Central Powers being restricted by how much Gold they had in reserve, the Gold Standard was temporarily suspended during the conflict and replaced by the issuances of Fiat Currencies pegged to Sovereign Schuld. After 1918, the Gold Standard was reinstated, although the German Reich would continue to rely on Fiat Currencies in order to pay the reparations imposed by the Versailles Treaty. Everyone familiar with the Inflation/Deflation Rate will recall that when the German Reich tried to pay its reparations in the Fiat Currency during the early 1920s, the Value of the German Reichsmark depreciated to the point of becoming worthless.

In response, attempts at realizing “Inflation Accounting” became paramount in order to demonstrate the relationship between Currency Depreciation/Appreciation and the economic activities of a national economy for the German Accounting Profession. They were intended to measure how the reparations payments would affect the Value of the German Reichsmark. A number of proposals stood out in the historical accounting literature, with special emphasis paid to the Balance Sheet:

  • Fritz Schmidt’s “Organic Balance Sheet.”
  • Walter Mahlberg’s “Balance Sheet Technique and Valuation During Periods of Currency Fluctuation.”
  • Eugen Schmalenbach’s “Currency Stabilization in the Balance Sheet Approach to Income Determination.”

The original concepts posited were to demonstrate how changes to the Price of Gold influence adjustments to the Prices of goods and services for Currencies pegged to the Gold Standard. Changes to the Price of Gold in turn affected the Value of Currency, which in turn impacts the Prices of goods and services from the production processes to the transactional sales for those goods and services. Although that may sound rather tame a century later, in the context of the German Reich after World War I, it was revolutionary to the extent that one could make valid arguments about the Reichsmark becoming increasingly worthless as a consequence of the war reparations payments of the Versailles Treaty. This conclusion can be extended further to include changes to the Exchange Rates between one Currency and that of another or a whole backet of Currencies.  

Cost Accounting

The German Accounting Profession found new purposes for itself that did not involve Financial Markets. In fact, the pressures placed on the Reichstag forced the German Accounting Profession to also act as independent accountants and auditors tasked with monitoring the Manufacturing Sector as well as the financial institutions that funded them. When the Great Depression occurred, the Reichstag passed a 1931 law that stipulated mandatory annual audits and turned the German Accounting Profession into the handmaiden of the Reich government.  

Managerial Cost Accounting,” in its original form, was an attempt at reapplying the old Cameralist methods to the Manufacturing Sector. Devised by Eugen Schmalenbach, it provided economic organizations with the ability to perform cost determination decisions. There are three notable variables incorporated into its methodology:

  1. The Cash Expenditures of the overall production process. The overall costs of how much to facilitate an entire production process, including any additional expenses incurred.
  2. The Expenses of production outputs. How much is required to manufacture goods and services.
  3. The Costs of resource inputs. How much is needed to acquire resources for goods and services.

With this setup, it is possible for economic organizations to determine the Prices of raw materials, the Prices of production, and the Prices of distributing and selling the finished products. It is especially ideal for the Manufacturing Sector, which relies on the Natural Sector for its raw materials and the Services Sector for distributors and retailers. An entire “Uniform System of Accounts” could be developed entirely around the total costs of all economic activities performed by a nation’s Manufacturing Sector. Economic organizations can inform each other about the Prices of assorted goods and services.

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