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For Students
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viii Preface

Acknowledgments
The genesis for this book and its approach reflect the oral tradition of my colleagues, past
and present, at the University of Rochester. William Meckling and Michael Jensen stimu-
lated my thinking and provided much of the theoretical structure underlying the book, as
anyone familiar with their work will attest. My long and productive collaboration with
Ross Watts further refined the approach. He also furnished most of the intellectual capi-
tal for Chapter 3, including the problem material. Ray Ball offered transformative ideas.
Clifford Smith and James Brickley continue to enhance my economic education. Three
colleagues, Andrew Christie, Dan Gode, and Scott Keating, supplied particularly insightful
comments that enriched the analysis at critical junctions. Valuable comments from Anil
Arya, Ron Dye, Andy Leone, Dale Morse, Ram Ramanan, K. Ramesh, Shyam Sunder, and
Joseph Weintrop are gratefully acknowledged.
This project benefited greatly from the honest and intelligent feedback of numerous
instructors. I wish to thank Mahendra Gupta, Susan Hamlen, Badr Ismail, Charles Kile,
Leslie Kren, Don May, William Mister, Mohamed Onsi, Stephen Ryan, Michael Sandretto,
Richard Sansing, Deniz Saral, Gary Schneider, Joe Weber, and William Yancey. This book
also benefited from three of my other textbook projects. Writing Management Accounting:
Analysis and Interpretation (McGraw-Hill Companies, 1997) with Dale Morse, Manage-
rial Economics and Organizational Architecture (McGraw Hill Education, 2016) with
James Brickley and Clifford Smith, and Management Accounting in a Dynamic Environ-
ment (Routledge, 2016) with Cheryl McWatters helped me to better present key concepts.
To the numerous students who endured the development process, I owe an enormous
debt of gratitude. I hope they learned as much from the material as I learned teaching them.
Some were even kind enough to provide critiques and suggestions—in particular, Jan
Dick Eijkelboom. Others supplied, either directly or indirectly, the problem material in
the text. The able research assistance of P. K. Madappa, Eamon Molloy, Jodi Parker, Steve
Sanders, Richard Sloan, and especially Gary Hurst contributed amply to the manuscript
and problem material. Janice Willett and Barbara Schnathorst did a superb job of editing
the manuscript and problem material.
The very useful comments and suggestions from the following reviewers are greatly
appreciated:

Urton Anderson William M. Cready Robert Hurt

Howard M. Armitage James M. Emig Douglas A. Johnson
Vidya Awasthi Gary Fane Lawrence A. Klein
Kashi Balachandran Anita Feller Thomas Krissek
Da-Hsien Bao Tahirih Foroughi A. Ronald Kucic
Ron Barden Ivar Fris Wikil Kwak
Howard G. Berline Jackson F. Gillespie Daniel Law
Margaret Boldt Irving Gleim Chi-Wen Jevons Lee
David Borst Jon Glover Suzanne Lowensohn
Eric Bostwick Gus Gordon James R. Martin
Marvin L. Bouillon Sylwia Gornik-Tomaszewski Alan H. McNamee
Wayne Bremser Tony Greig Marilyn Okleshen
David Bukovinsky Susan Haka Shailandra Pandit
Linda Campbell Bert Horwitz Sam Phillips
Jane Cote Steven Huddart Frank Probst
Preface ix

Kamala Raghavan Henry Schwarzbach Clark Wheatley

William Rau Elizabeth J. Serapin Lourdes F. White
Jane Reimers Steve Shively Paul F. Williams
Thomas Ross Norman Shultz Robert W. Williamson
Harold P. Roth James C. Stallman Peggy Wright
P. N. Saksena William Thomas Stevens Jeffrey A. Yost
Donald Samaleson Monte R. Swain S. Mark Young
Michael J. Sandretto Heidi Tribunella Mustafa Younis
Richard Saouma Suneel Udpa
Arnold Schneider Robert Wesoloskie

To my wife, Dodie, and daughters, Daneille and Amy, thank you for setting the right
priorities and for giving me the encouragement and environment to be productive. Finally,
I wish to thank my parents for all their support.
Jerold L. Zimmerman
University of Rochester
 Brief Contents

1 Introduction 1
2 The Nature of Costs 21
3 Opportunity Cost of Capital and Capital Budgeting 84
4 Organizational Architecture 124
5 Responsibility Accounting and Transfer Pricing 156
6 Budgeting 211
7 Cost Allocation: Theory 273
8 Cost Allocation: Practices 319
9 Absorption Cost Systems 384
10 Criticisms of Absorption Cost Systems: Incentive to Overproduce 439
11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs 473
12 Standard Costs: Direct Labor and Materials 527
13 Overhead and Marketing Variances 563
14 Management Accounting in a Changing Environment 597

Solutions to Concept Questions 644

Glossary 654
Index 658

x
 Contents

1 Introduction 1
A. Managerial Accounting: Decision Making and Control 2
B. Design and Use of Cost Systems 4
C. Marmots and Grizzly Bears 7
D. Management Accountant’s Role in the Organization 9
E. Evolution of Management Accounting: A Framework for Change 11
F. Vortec Medical Probe Example 14
G. Outline of the Text 17
H. Summary 18

2 The Nature of Costs 21

A. Opportunity Costs 22
1. Characteristics of Opportunity Costs 23
2. Examples of Decisions Based on Opportunity Costs 23
B. Cost Variation 27
1. Fixed, ­Marginal, and Average Costs 27
2. Linear Approximations 30
3. Other Cost Behavior Patterns 31
4. Activity Measures 32
C. Cost–Volume–Profit Analysis 33
1. Copier Example 33
2. Calculating Break-Even and Target Profits 34
3. Limitations of Cost–Volume– Profit Analysis 38
4. Multiple Products 40
5. Operating Leverage 41
D. Opportunity Costs versus Accounting Costs 43
1. Period versus Product Costs 45
2. Direct Costs, Overhead Costs, and Opportunity Costs 45
E. Cost Estimation 47
1. Account Classification 47
2. Motion and Time Studies 48
F. Summary 48
Appendix: Costs and the Pricing Decision 49

3 Opportunity Cost of Capital and Capital Budgeting 84

A. Opportunity Cost of Capital 85
B. Interest Rate Fundamentals 88
1. Future Values 88

xi
xii Contents

2. Present Values 89
3. Present Value of a Cash Flow Stream 90
4. Perpetuities 91
5. Annuities 91
6. Multiple Cash Flows per Year 92
C. Capital Budgeting: The Basics 94
1. Decision to Acquire an MBA 94
2. Decision to Open a Day Spa 95
3. Essential Points about Capital Budgeting 96
D. Capital Budgeting: Some Complexities 97
1. Risk 97
2. Inflation 99
3. Taxes and Depreciation Tax Shields 100
E. Alternative Investment Criteria 102
1. Payback 102
2. Accounting Rate of Return 103
3. Internal Rate of Return 105
4. Methods Used in Practice 108
F. Summary 108

4 Organizational Architecture 124

A. Basic Building Blocks 125
1. Self-Interested Behavior, Team Production, and Agency Costs 125
2. Decision Rights and Rights Systems 130
3. Role of Knowledge and Decision Making 131
4. Markets ­versus Firms 132
5. Influence Costs 134
B. Organizational Architecture 135
1. Three-Legged Stool 135
2. Decision Management versus Decision Control 138
C. Accounting’s Role in the Organization’s Architecture 140
D. Example of Accounting’s Role: Executive Compensation Contracts 143
E. Summary 143

5 Responsibility Accounting and Transfer Pricing 156

A. Responsibility Accounting 157
1. Cost Centers 158
2. Profit Centers 160
3. Investment Centers 161
4. Economic Value Added (EVA®) 165
5. Controllability Principle 168
B. Transfer Pricing 169
1. International Taxation 169
2. Economics of Transfer Pricing 171
3. Common Transfer-Pricing Methods 175
4. Reorganization: The Solution if All Else Fails 180
5. Recap 180
C. Summary 182
Contents xiii

6 Budgeting 211
A. Generic Budgeting Systems 213
1. Country Club 213
2. Large Corporation 217
B. Trade-Off between Decision Management and Decision Control 220
1. Communicating Specialized Knowledge versus Performance
Evaluation 220
2. Budget Ratcheting 220
3. Participative Budgeting 223
4. New Approaches to Budgeting 224
5. Managing the Trade-Off 226
C. Resolving Organizational Problems 226
1. Short-Run versus Long-Run Budgets 227
2. Line-Item Budgets 229
3. Budget Lapsing 229
4. Static versus Flexible Budgets 230
5. Incremental versus Zero-Based Budgets 233
D. Summary 234
Appendix: Comprehensive Master Budget Illustration 235

7 Cost Allocation: Theory 273

A. Pervasiveness of Cost Allocations 274
1. Manufacturing Organizations 276
2. Hospitals 277
3. Universities 277
B. Reasons to Allocate Costs 279
1. External Reporting/Taxes 279
2. Cost-Based Reimbursement 280
3. Decision Making and Control 281
C. Incentive/Organizational Reasons for Cost Allocations 282
1. Cost Allocations Are a Tax System 282
2. Taxing an Externality 283
3. Insulating versus Noninsulating Cost Allocations 289
D. Summary 292

8 Cost Allocation: Practices 319

A. Death Spiral 320
B. Allocating Capacity Costs: Depreciation 325
C. Allocating Service Department Costs 325
1. Direct Allocation Method 327
2. Step-Down Allocation Method 329
3. Service Department Costs and Transfer Pricing of Direct and Step-Down
Methods 331
4. Reciprocal Allocation Method 334
5. Recap 336
D. Joint Costs 336
1. Joint Cost Allocations and the Death Spiral 338
2. Net Realizable Value 340
3. Decision Making and Control 344
xiv Contents

E. Segment Reporting and Joint Benefits 345

F. Summary 346
Appendix: Reciprocal Method for Allocating Service Department Costs 346

9 Absorption Cost Systems 384

A. Job Order Costing 386
B. Cost Flows through the T-Accounts 388
C. Allocating Overhead to Jobs 390
1. Overhead Rates 390
2. Over/­Underabsorbed Overhead 392
3. Flexible ­Budgets to ­Estimate Overhead 395
4. Expected versus Normal Volume 398
D. Permanent versus Temporary Volume Changes 402
E. Plantwide versus Multiple Overhead Rates 403
F. Process Costing: The Extent of Averaging 406
G. Summary 407
Appendix A: Process Costing 408
Appendix B: Demand Shifts, Fixed Costs, and Pricing 413

10 Criticisms of Absorption Cost Systems: Incentive to Overproduce 439

A. Incentive to Overproduce 441
1. Example 441
2. Reducing the Overproduction Incentive 444
B. Variable (Direct) Costing 445
1. Background 445
2. Illustration of Variable Costing 445
3. Overproduction Incentive under Variable Costing 448
C. Problems with Variable Costing 449
1. Classifying Fixed Costs as Variable Costs 449
2. Variable ­Costing Excludes the Opportunity Cost of Capacity 451
D. Beware of Unit Costs 452
E. Summary 453

11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs 473

A. Inaccurate Product Costs 474
B. Activity-Based Costing 479
1. Choosing Cost Drivers 479
2. Absorption versus Activity-Based Costing: An Example 485
C. Analyzing Activity-Based Costing 489
1. Reasons for Implementing Activity-Based Costing 490
2. Benefits and Costs of Activity-Based Costing 491
3. ABC Measures Costs, Not Benefits 493
D. Acceptance of Activity-Based Costing 495
E. Summary 498

12 Standard Costs: Direct Labor and Materials 527

A. Standard Costs 528
1. Reasons for Standard Costing 529
Contents xv

2. Setting and Revising Standards 530

3. Target Costing 533
B. Direct Labor and Materials Variances 535
1. Direct Labor Variances 535
2. Direct Materials Variances 539
3. Risk Reduction and Standard Costs 543
C. Incentive Effects of Direct Labor and Materials Variances 543
1. Build Inventories 544
2. Externalities 544
3. Discouraging Cooperation 545
4. Mutual Monitoring 545
5. Satisficing 545
D. Disposition of Standard Cost Variances 546
E. The Costs of Standard Costs 548
F. Summary 550

13 Overhead and Marketing Variances 563

A. Budgeted, Standard, and Actual Volume 564
B. Overhead Variances 567
1. Flexible Overhead Budget 567
2. Overhead Rate 568
3. Overhead Absorbed 569
4. Overhead Efficiency, Volume, and Spending Variances 569
5. Graphical Analysis 573
6. Inaccurate Flexible Overhead Budget 575
C. Marketing Variances 576
1. Price and Quantity Variances 576
2. Mix and Sales Variances 577
D. Summary 579

14 Management Accounting in a Changing Environment 597

A. Integrative Framework 598
1. Organizational Architecture 599
2. Business Strategy 600
3. Environmental and Competitive Forces Affecting Organizations 602
4. Implications 603
B. Organizational Innovations and Management Accounting 604
1. Six Sigma/Total Quality Management 604
2. Lean/Just-in-Time Production 609
3. Balanced Scorecard 613
4. Big Data/Data Analytics 619
C. When Should the Internal Accounting System Be Changed? 621
D. Summary 622
Solutions to Concept Questions   644
Glossary  654
Index  658
Chapter One

Introduction
Chapter Outline
A. Managerial Accounting: Decision Making
and Control
B. Design and Use of Cost Systems
C. Marmots and Grizzly Bears
D. Management Accountant’s Role in the
Organization
E. Evolution of Management Accounting:
A Framework for Change
F. Vortec Medical Probe Example
G. Outline of the Text
H. Summary

1
2 Chapter 1

A. Managerial Accounting: Decision Making and Control

Managers at Hyundai must decide which car models to produce, the quantity of each
model to produce given the selling prices for the models, and how to manufacture the auto-
mobiles. They must decide which car parts, such as headlight assemblies, Hyundai should
manufacture internally and which parts should be outsourced. They must decide not only
on advertising, distribution, and product positioning to sell the cars, but also the quantity
and quality of the various inputs. For example, they must determine which models will
have leather seats and the quality of the leather to be used. Similarly, in deciding which
investment projects to accept, capital budgeting analysts require data on future cash flows.
How are these numbers derived? How does one coordinate the activities of hundreds or
thousands of employees in the firm so that these employees accept senior management’s
leadership? At Hyundai, and at other organizations small and large, managers must have
good information to make all these decisions.
Information about firms’ future costs and revenues must be estimated by managers.
Organizations’ internal information systems provide some of the knowledge for these pric-
ing, production, capital budgeting, and marketing decisions. These systems range from the
informal and the rudimentary to very sophisticated, electronic management information
systems. The term information system should not be interpreted to mean a single, inte-
grated system. Most information systems consist not only of formal, organized, tangible
records such as payroll and purchasing documents, but also informal, intangible bits of
data such as memos, special studies, and managers’ impressions and opinions. The firm’s
information system also contains nonfinancial information such as customer and employee
satisfaction surveys. As firms grow from single proprietorships to large global corpora-
tions with tens of thousands of employees, managers lose the knowledge of enterprise
affairs gained from personal, face-to-face contact in daily operations. Higher-level manag-
ers of larger firms come to rely more and more on formal operating reports.
The internal accounting system, an important component of a firm’s information
system, includes budgets, data on the costs of each product and current inventory, and
periodic financial reports. In many cases, especially in small companies, these accounting
reports are the only formalized part of the information system providing the knowledge
for decision making. Many larger companies have other formalized, nonaccounting–based
information systems, such as production planning systems. This book focuses on how
internal accounting systems provide knowledge for decision making.
After making decisions, managers must implement them in organizations in which the
interests of the employees and the owners do not necessarily coincide. Just because senior
managers announce a decision does not ensure that the decision will be implemented.
Organizations do not have objectives; people do. One common objective of owners of
the organization is to maximize profits, or the difference between revenues and expenses.
Maximizing firm value is equivalent to maximizing the stream of profits over the organiza-
tion’s life. Employees, suppliers, and customers also have their own objectives—usually
maximizing their self-interest.
Not all owners care only about monetary flows. An owner of a professional sports team
might care more about winning (subject to covering costs) than maximizing profits. Nonprof-
its do not have owners with the legal rights to the organization’s profits. Moreover, nonprof-
its seek to maximize their value by serving some social goal such as education or health care.
No matter what the firm’s objective, the organization will survive only if its inflow of
resources (such as revenue) is at least as large as the outflow. Accounting information is
useful to help manage the inflow and outflow of resources and to help align the owners’
and employees’ interests, no matter what objectives the owners wish to pursue.
Introduction 3

Throughout this book, we assume that individuals maximize their self-interest. The
owners of the firm usually want to maximize profits, but managers and employees will do
so only if it is in their interest. Hence, a conflict of interest exists between owners—who,
in general, want higher profits—and employees—who want easier jobs, higher wages, and
more fringe benefits. To control this conflict, senior managers and owners design systems
to monitor employees’ behavior and incentive schemes that reward employees for generat-
ing more profits. Not-for-profit organizations face similar conflicts. Those people responsi-
ble for the nonprofit organization (boards of trustees and government officials) must design
incentive schemes to motivate their employees to operate the organization efficiently.
All successful firms must devise mechanisms that help align employee interests with
maximizing the organization’s value. All of these mechanisms constitute the firm’s control
system; they include performance measures and incentive compensation systems, promo-
tions, demotions and terminations, security guards and video surveillance, internal audi-
tors, and the firm’s internal accounting system.
As part of the firm’s control system, the internal accounting system helps align the
interests of managers and shareholders to cause employees to maximize firm value. It
sounds like a relatively easy task to design systems to ensure that employees maximize
firm value. But a significant portion of this book demonstrates the exceedingly complex
nature of aligning employee interests with those of the owners.
Internal accounting systems serve two purposes: (1) to provide some of the ­knowledge
necessary for planning and making decisions (decision making) and (2) to help moti-
vate and monitor people in organizations (control). Preventing fraud and embezzlement
is the most basic control use of accounting. Maintaining inventory records helps reduce
employee theft. Accounting budgets, discussed more fully in Chapter 6, provide an exam-
ple of both decision making and control. Asking each salesperson in the firm to fore-
cast his or her sales for the upcoming year generates useful information for planning next
year’s production (decision making). However, if the salesperson’s sales forecast is used
to benchmark performance for compensation purposes (control), he or she has incentives
to underestimate those forecasts.
Using internal accounting systems for both decision making and control gives rise to
the fundamental trade-off in these systems: A system cannot be designed to perform two
tasks as well as a system that must perform only one task. Some ability to deliver knowl-
edge for decision making is sacrificed to provide better motivation (control). The trade-off
between providing knowledge for decision making and motivation/control arises continu-
ally throughout this text.
This book is applications oriented: It describes how the accounting system assembles
knowledge necessary for implementing decisions using the theories from microeconomics,
finance, operations management, and marketing. It also shows how the accounting system
helps motivate employees to implement these decisions. Moreover, it stresses the continual
trade-offs that must be made between the decision making and control functions of accounting.
Chief financial officers (CFOs), responsible for their company’s accounting system,
identify “managing costs and profitability” as their most important goal. Other top priori-
ties include setting budgets and measuring performance. These findings indicate that firms
use their internal accounting system both for decision making (managing costs and profit-
ability) and for controlling behavior (setting budgets and measuring performance).1

1
S. White, “How CFOs Can Support the Transformation to a Digital Business Model,” Financial
­Management, November 4, 2015, https://www.fm-magazine.com/news/2015/nov/how-cfos-can-support-
digital-business-model-201513323.html.
4 Chapter 1

The firm’s accounting system provides much of the fabric that helps hold the orga-
nization together. It contains knowledge for decision making, and it provides information
for evaluating and motivating the behavior of individuals within the firm. Being such an
integral part of the organization, the accounting system cannot be studied in isolation from
the other mechanisms used for decision making or for aligning incentives. A firm’s inter-
nal accounting system should be examined from a broad perspective, as part of the larger
organization design question facing managers.
This book uses an economic perspective to study how accounting can motivate and
control behavior in organizations. Besides economics, a variety of other paradigms also are
used to investigate organizations: scientific management (Taylor), the bureaucratic school
(Weber), the human relations approach (Mayo), human resource theory (Maslow, Rickert,
Argyris), the decision-making school (Simon), and the political science school (Selznick).
Behavior is a complex topic. No single theory or approach is likely to capture all the ele-
ments. However, understanding managerial accounting requires addressing the behavioral
and organizational issues. Economics offers one useful and widely adopted framework.

B. Design and Use of Cost Systems

Managers make decisions and monitor subordinates who make decisions. Both manag-
ers and accountants must acquire sufficient familiarity with cost systems to perform their
jobs. Accountants (often called controllers) are charged with designing, improving, and
operating the firm’s accounting system—an integral part of both the decision-making and
performance evaluation systems. Both managers and accountants must understand the
strengths and weaknesses of current accounting systems. Internal accounting systems,
like all s­ ystems within the firm, are constantly being refined and modified. Accountants’
responsibilities include making these changes.
Internal accounting systems:
1. Provide information to assess the profitability of products or services and to
­optimally price and market these products or services.
2. Provide information to detect production inefficiencies to ensure that the
­proposed products and volumes are produced at minimum cost.
3. When combined with the performance evaluation and reward systems, create
incentives for managers to maximize firm value.
4. Support the financial accounting and tax accounting reporting functions.
5. Contribute more to firm value than it costs.
Figure 1–1 portrays the functions of the accounting system. In it, the accounting
system supports both external and internal reporting systems. Examine the top half of
Figure 1–1. The accounting procedures chosen for external reports to shareholders and
taxing authorities are dictated in part by regulators. In the United States, the Securities
and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB)
regulate the financial statements issued to shareholders. The Internal Revenue Service
(IRS) administers the a­ ccounting procedures used in calculating corporate income taxes. If
the firm is involved in international trade, foreign tax authorities prescribe the accounting
rules applied in c­ alculating foreign taxes. Regulatory agencies constrain public utilities’
and financial institutions’ ­accounting procedures.
Management compensation plans and debt contracts often rely on external reports.
Senior managers’ bonuses are often based on accounting net income. Likewise, if the firm
issues long-term bonds, it agrees in the debt covenants not to violate specified
 Introduction 5

FIGURE 1–1
Taxing Board of
The multiple role of Regulation
Authorities Directors
accounting systems

IRS & Foreign Regulatory Senior Management

Tax Authorities Authorities Compensation Plans

External Debt
Shareholders SEC/FASB Bondholders
Reports Covenants

Accounting
System

Internal
Reports

Control of
Decision
Organizational
Making
Problems

accounting-based constraints. For example, the bond contract might specify that the debt-
to-equity ratio will not exceed some limit. Like taxes and regulation, compensation plans
and debt covenants create incentives for managers to choose particular accounting
procedures.2
As companies expand into international markets, external users of the firm’s financial
statements become global. No longer are the firm’s shareholders, tax authorities, and regu-
lators domestic. Rather, the firm’s internal and external reports are used internationally in
a variety of ways.
The bottom of Figure 1–1 illustrates that internal reports are used for decision mak-
ing as well as control of organizational problems. As discussed earlier, managers use a
variety of sources of data for making decisions. The internal accounting system provides
one ­important source. These internal reports affect the behavior of managers in the firm.
The internal accounting system reports on managers’ performance and therefore provides
incentives for them. Any changes to the internal accounting system can affect all the vari-
ous uses of the resulting accounting numbers.
The internal and external accounting reports are closely linked. The internal account-
ing system affords a more disaggregated view of the company. These internal reports are
generated more frequently, usually monthly or even weekly or daily, whereas the external
reports are provided quarterly for publicly traded U.S. companies. The internal reports
offer costs and profits by specific products, customers, lines of business, and divisions
of the company. For example, the internal accounting system computes the unit cost of
individual products produced. These unit costs are then used to value the work-in-process
and finished goods inventory, and to compute cost of goods sold. Chapter 9 describes the
details of product costing.

2
For further discussion of the incentives of managers to choose accounting methods, see R. Watts and
J. Zimmerman, Positive Accounting Theory (Englewood Cliffs, NJ: Prentice Hall, 1986).
6 Chapter 1

Managerial Multiple accounting systems are confusing and can lead to errors. An extreme example
Application: of this occurred in 1999 when NASA lost its $125 million Mars spacecraft. Engineers
Spaceship at Lockheed Martin built the spacecraft and specified the spacecraft’s thrust in English
Lost Because pounds. But NASA scientists, navigating the craft, assumed the information was in
Two Mea- metric newtons. As a result, the spacecraft was off course by 60 miles as it approached
sures Used Mars and crashed. Multiple systems for the same underlying construct often produce
confusion and decision making errors.
SOURCE: A. Pollack, “Two Teams, Two Measures Equaled One Lost Spacecraft,” The New York Times. October 1, 1999, p. 1.

Because internal accounting systems serve multiple users and have several purposes,
the firm employs either multiple systems (one for each function) or one basic system that
serves all three functions (decision making, performance evaluation, and external report-
ing). Firms can either maintain a single set of books and use the same accounting methods
for both internal and external reports, or they can keep multiple sets of books. The decision
depends on the costs of writing and maintaining contracts based on accounting numbers,
the costs from the dysfunctional internal decisions made using a single system, the addi-
tional bookkeeping costs arising from the extra system, and the confusion of having to
reconcile the different numbers arising from multiple accounting systems.
Inexpensive accounting software packages and falling costs of information technology
reduce some of the costs of maintaining multiple accounting systems. However, confu-
sion arises when the systems report different numbers for the same concept. For example,
when one system reports the manufacturing cost of a product as $12.56 and another sys-
tem reports it at $17.19, managers wonder which system is producing the “right” number.
Some managers may be using the $12.56 figure while others are using $17.19, causing
inconsistency and uncertainty. Whenever two numbers for the same concept are produced,
the natural tendency is to explain (i.e., reconcile) the differences. Managers involved in
this reconciliation could have used their time more productively. Also, using the same
accounting system for multiple purposes increases the credibility of the financial reports
for each purpose. With only one accounting system, the external auditor monitors the inter-
nal reporting system at little or no additional cost.
A survey of large U.S. firms found that managers typically use the same accounting
procedures for both external and internal reporting. More than 80 percent of chief financial
officers (CFOs) report using the same accounting methods and report the same earnings
internally and externally. In other words, most firms use “one number” for both external
and internal communications. One CFO stated, “We make sure that everything that we
have underneath—in terms of the detailed reporting—also rolls up basically to the same

Historical “. . . cost accounting has a number of functions, calling for different, if not inconsistent,
Application: information. As a result, if cost accounting sets out, determined to discover what the
Different cost of everything is and convinced in advance that there is one figure which can be
Costs for found and which will furnish exactly the information which is desired for every pos-
Different sible purpose, it will necessarily fail, because there is no such figure. If it finds a figure
Purposes which is right for some purposes it must necessarily be wrong for others.”
SOURCE: J. Clark, Studies in the Economics of Overhead Cost (Chicago: University of Chicago Press, 1923), p. 234.
 Introduction 7

story that we’ve told externally.”3 Nothing prevents firms from using separate accounting
systems for internal decision making and internal performance evaluation except the con-
fusion generated and the extra data processing costs.
Probably the most important reason firms use a single accounting system is it allows
reclassification of the data. An accounting system does not present a single, bottom-line
number, such as the “cost of publishing this textbook.” Rather, the system reports the
components of the total cost of this textbook: the costs of proofreading, typesetting, paper,
binding, cover, and so on. Managers in the firm then reclassify the information on the basis
of different attributes and derive different cost numbers for different decisions. For exam-
ple, if the publisher is considering translating this book into Chinese, not all the compo-
nents used in calculating the U.S. costs are relevant. The Chinese edition might be printed
on different paper stock with a different cover. The point is, a single accounting system
usually offers enough flexibility for managers to reclassify, recombine, and reorganize the
data for multiple purposes.
A single internal accounting system requires the firm to make trade-offs. A system
that is best for performance measurement and control is unlikely to be the best for decision
making. It’s like configuring a motorcycle for both off-road and on-road racing: Riders
on bikes designed for both racing conditions probably lose to riders on bikes designed for
just one racing surface. Wherever a single accounting system exists, additional analyses
arise. Managers making decisions find the accounting system less useful and devise other
systems to augment the accounting numbers for decision-making purposes.

Concept Q1–1 What causes the conflict between using internal accounting
Questions systems for decision making and control?
Q1–2 Describe the different kinds of information provided by the
internal accounting system.
Q1–3 Give three examples of the uses of an accounting system.
Q1–4 List the characteristics of an internal accounting system.
Q1–5 Do firms have multiple accounting systems? Why or why not?

C. Marmots and Grizzly Bears

Managers often criticize accounting’s usefulness for making pricing or outsourcing deci-
sions. Accounting data are based on historical costs rather than current values, and hence
contain stale information. Why then do managers persist in using (presumably inferior)
accounting information?
Before addressing this question, consider the parable of the marmots and the grizzly
bears.4 Marmots are small groundhogs that are a principal food source for certain bears.
Zoologists studying the ecology of marmots and bears observed bears digging and mov-
ing rocks in the autumn in search of marmots. They estimated that the calories expended
searching for marmots exceeded the calories obtained from their consumption. A zoologist

3
SOURCE: I. D. Dichev, J. R. Graham, H. Campbell, and S. Rajgopal, S., “Earnings Quality: Evidence from
the Field,” Journal of Accounting and Economics 56, no. 2–3 (2013), pp. 1–33.
4
This example is suggested by J. McGee, “Predatory Pricing Revisited,” Journal of Law & Economics
XXIII (October 1980), pp. 289–330.
8 Chapter 1

relying on Darwin’s theory of natural selection might conclude that searching for marmots
is an inefficient use of the bear’s limited resources and thus these bears should become
extinct. But fossils of marmot bones near bear remains suggest that bears have been
searching for marmots for tens of thousands of years.
Because the bears survive, the benefits of consuming marmots must exceed the costs.
Bears’ claws might be sharpened as a by-product of the digging involved in hunting for
marmots. Sharp claws help bears searching for food under the ice after winter’s hiberna-
tion. Therefore, the benefit of sharpened claws and the calories derived from the marmots
offset the calories consumed gathering the marmots.
What does the marmot-and-bear parable say about why managers persist in using
apparently inferior accounting data in their decision making? As it turns out, the marmot-
and-bear parable is an extremely important proposition in the social sciences known as
economic Darwinism. In a competitive world, if surviving organizations use some oper-
ating procedure (such as historical cost accounting) over long periods of time, then this
procedure likely yields benefits in excess of its costs. Firms survive in competition by
selling goods or services at lower prices than their competitors while still covering costs.
Companies cannot survive by making more mistakes than their competitors.
Economic Darwinism suggests that successful (surviving) firms should not change
internal processes unless they are clearly broken. Currently, considerable attention is being
directed at revising and updating firms’ internal accounting systems because many man-
agers believe their current accounting systems are “broken” and require major overhaul.
Alternative internal accounting systems are being proposed, among them activity-based
costing (ABC), balanced scorecards, economic value added (EVA), and lean accounting
systems. These systems are discussed and analyzed later in terms of their ability to help
managers make better decisions, as well as to help provide better measures of performance
for managers in organizations, thereby aligning managers’ and owners’ interests.
Although internal accounting systems often appear inconsistent with some particular
theory, these systems (like the bears searching for marmots) have survived the test of time
and therefore are likely yielding unobserved benefits (like claw sharpening). This book
discusses these additional benefits. Two caveats exist concerning too strict an application
of economic Darwinism:
1. Some surviving operating procedures can be neutral mutations. Just because a
system survives does not mean that its benefits exceed its costs. Benefits less
costs might be close to zero.
2. Just because a given system survives does not mean it is optimal. A better system
might exist but has not yet been discovered.

Terminology: Benchmarking is a technique where a company compares its performance against the
Benchmark- best firms, determines how those firms achieved their superior performance, and uses
ing and the knowledge to improve its own performance.
Economic Economic Darwinism predicts that managers copy the practices of highly success-
Darwinism ful companies through benchmarking studies. The practice of benchmarking dates back
to 607, when Japan sent teams to China to learn the best practices in business, govern-
ment, and education. Today, most large enterprises routinely conduct benchmarking
studies to discover the best business practices and then imple­ment them in their firms.
SOURCE: American Society for Quality http://asq.org/learn-about-quality/benchmarking/overview/overview.html.
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and song, which waste so much precious time, and give so much
disagreeable trouble to learn; and which also, when learned, are too
likely to be used in the service of idols; while the skills which our
modern gospel substitutes for both, of steam-whistle, namely, and
photograph, supply, with all that they need of terrestrial pleasure, the
ears which God has redeemed from spiritual deafness, and the eyes
which He has turned from darkness to light.

My readers are already, I hope, well enough acquainted with the

Institutes of the St. George’s Company to fear no monastic
restrictions of enjoyment, nor imperative choice of their books,
carried to this celestially Utopian [301]strictness. And yet,
understanding the terms of the sentence with true and scholarly
accuracy, I must, in educational legislation, insist on the daughters of
my Companions fulfilling this resolution to the letter: “I am resolved
never to read worldly books any more, and my music and drawing I
have laid aside for ever.”

“Worldly books”? Yes; very certainly, when you know which they are;
for I will have you to abjure, with World, Flesh, and Devil, the
literature of all the three:—and your music and drawing,—that is to
say, all music and drawing which you have learned only for your own
glory or amusement, and respecting which you have no idea that it
may ever become, in a far truer sense, other people’s music and
drawing.

For all the arts of mankind, and womankind, are only rightly learned,
or practised, when they are so with the definite purpose of pleasing
or teaching others. A child dancing for its own delight,—a lamb
leaping,—or a fawn at play, are happy and holy creatures; but they
are not artists. An artist is—and recollect this definition, (put in
capitals for quick reference,)—a person who has submitted to a
law which it was painful to obey, that he may bestow a
delight which it is gracious to bestow. 2 [302]

“A painful law,” I say; yet full of pain, not in the sense of torture, but
of stringency, or constraint; and labour, increasing, it may be,
sometimes into aching of limbs, and panting of breasts: but these
stronger yet, for every ache, and broader for every pant; and farther
and farther strengthened from danger of rheumatic ache, and
consumptive pant.

This, so far as the Arts are concerned, is ‘entering in at the Strait

gate,’ of which entrance, and its porter’s lodge, you will find farther
account given in my fourth morning in Florence, which I should like
you to read, as a preparation for the work more explicitly now to be
directed under St. George. The immediate gist of it, for those who do
not care to read of Florence, I must be irksome enough again to give
here; namely, that the word Strait, applied to the entrance into Life,
and the word Narrow, applied to the road of Life, do not mean that
the road is so fenced that few can travel it, however much they wish,
(like the entrance to the pit of a theatre,) 3 but that, for each person, it
is at first so stringent, so difficult, and so dull, being between close
hedges, that few will enter it, though all may. In a second sense, and
an equally vital one, it is not merely a Strait, or narrow, but a straight,
or right road; only, in this rightness of it, not at all traced by hedges,
wall, or telegraph wire, or even marked by posts higher [303]than
winter’s snow; but, on the contrary, often difficult to trace among
morasses and mounds of desert, even by skilful sight; and by blind
persons, entirely untenable, unless by help of a guide, director,
rector, or rex: which you may conjecture to be the reason why, when
St Paul’s eyes were to be opened, out of the darkness which meant
only the consciousness of utter mistake, to seeing what way he
should go, his director was ordered to come to him in the “street
which is called Straight.”
Now, bringing these universal and eternal facts down to this narrow,
straight, and present piece of business we have in hand, the first
thing we have to learn to draw is an extremely narrow, and an
extremely direct, line. Only, observe, true and vital direction does not
mean that, without any deflection or warp by antagonist force, we
can fly, or walk, or creep at once to our mark; but that, whatever the
antagonist force may be, we so know and mean our mark, that we
shall at last precisely arrive at it, just as surely, and it may be in
some cases more quickly, than if we had been unaffected by lateral
or opposing force. And this higher order of contending and victorious
rightness, which in our present business is best represented by the
track of an arrow, or rifle-shot, affected in its course both by gravity
and the wind, is the more beautiful rightness or directness of the two,
and the one which all fine art sets itself principally to achieve. But its
quite first [304]step must nevertheless be in the simple production of
the mathematical Right line, as far as the hand can draw it; joining
two points, that is to say, with a straight visible track, which shall as
nearly as possible fulfil the mathematical definition of a line, “length
without breadth.”

And the two points had better at first be placed at the small distance
of an inch from each other, both because it is easy to draw so short a
line, and because it is well for us to know, early in life, the look of the
length of an inch. And when we have learned the look of our own
English inch, we will proceed to learn the look of that which will
probably be our currency measure of length, the French inch, for that
is a better standard than ours, for European acceptance.

Here, I had made arrangements for the production of a plate, and

woodcut, to illustrate the first steps of elementary design; but the
black-plague of cloud already more than once spoken of (as
connected probably with the diminution of snow on the Alps), has
rendered it impossible for my assistants to finish their work in time.
This disappointment I accept thankfully as the ordinance of my
careful and prudent mistress, Atropos,—the third Fors; and am
indeed quickly enough apprehensive of her lesson in it. She wishes
me, I doubt not, to recognize that I was foolish in designing the
intrusion of technical advice [305]into my political letters; and to
understand that the giving of clear and separate directions for
elementary art-practice is now an imperative duty for me, and that
these art-lessons must be in companionship with my other school
books on the Earth and its Flowers.

I must needs do her bidding; and as I gather my past work on rocks

and plants together, so I must, day by day, gather what I now know
to be right of my past work on art together; and, not in sudden
thought, but in the resumption of purpose which I humbly and
sincerely entreat my mistress to pardon me for having abandoned
under pressure of extreme fatigue, I will publish, in the same form as
the geology and botany, what I desire to ratify, and fasten with nails
in a sure place, with instant applicability to school and university
exercises, of my former writings on art. 4

But this, I beg my readers to observe, will be the seventh large book
I have actually at this time passing through the press; 5 besides
having written and published four volumes of university lectures 6 in
the [306]last six years; every word of them weighed with care. This is
what I observe the ‘Daily Telegraph’ calls giving ‘utterances few and
far between.’ But it is as much certainly as I am able at present to
manage; and I must beg my correspondents, therefore, to have
generally patience with me when I don’t answer their letters by return
of post; and above all things, to write them clear, and in a round
hand, with all the ms and ns well distinguished from us.

The woodcut, indeed, prepared for this Fors was to have been a
lesson in writing; but that must wait till next year, now; meantime you
may best prepare yourself for that, and all other lessons to be given
in my new edition of the Elements of Drawing, by beginning to form
your own cherished and orderly treasures of beautiful art. For
although the greatest treasury in that kind, belonging to St. George’s
Company, will be as often aforesaid public property, in our museums,
every householder of any standing whatever among us will also have
his own domestic treasury, becoming hereditary as accumulative;
and accurately catalogued, so that others may know what peculiar or
separate good things are to be found in his house, and have
graciously permitted use of them if true necessity be.

The basis, however, of such domestic treasury will of course be

common to all; every household having its [307]proper books for
religious and economic service, and its classic authors, and
engravings.

With the last we must at present class, and largely use, the more
perishable treasure of good photographs; these, however, I do not
doubt but that modern science will succeed, (if it has not already
done so,) in rendering permanent; and, at all events, permanent
copies of many may soon be placed in all our schools. Of such
domestic treasure we will begin with a photograph of the picture by
Fra Filippo Lippi, representing the Madonna; which picture last year
had its place over the door of the inner room of the Uffizii of
Florence, beyond the Tribune. This photograph can of course
eventually be procured in any numbers; and, assuming that my
readers will get one, I shall endeavour in this and future numbers of
Fors, to make it useful to them, and therefore a treasure. 7

The first thing you are to observe in it is that the figures are
represented as projecting in front of a frame or window-sill. The
picture belongs, therefore, to the class meant to be, as far as
possible, deceptively like reality; and is in this respect entirely
companionable with one long known in our picture-shops, and
greatly popular with the British innkeeper, of a smuggler on the look-
out, with his hand and pistol projecting [308]over the window-sill. The
only differences in purpose between the painter of this Anglican
subject and the Florentine’s, are, first, that the Florentine wishes to
give the impression, not of a smuggler’s being in the same room with
you, but of the Virgin and Child’s being so; and, secondly, that in this
representation he wishes not merely to attain deceptive reality; but to
concentrate all the skill and thought that his hand and mind possess,
in making that reality noble.

Next, you are to observe that with this unusually positive realism of
representation, there is also an unusually mystic spiritualism of
conception. Nearly all the Madonnas, even of the most strictly
devotional schools, themselves support the child, either on their
knees or in their arms. But here, the Christ is miraculously borne by
angels;—the Madonna, though seated on her throne, worships with
both hands lifted.

Thirdly, you will at first be pained by the decision of line, and, in the
children at least, uncomeliness of feature, which are characteristic,
the first, of purely-descended Etruscan work; the second, of the
Florentine school headed afterwards by Donatello. But it is
absolutely necessary, for right progress in knowledge, that you begin
by observing and tracing decisive lines; and that you consider dignity
and simplicity of expression more than beauty of feature. Remember
also that a photograph necessarily loses the most subtle beauty
[309]of all things, because it cannot represent blue or grey colours, 8
and darkens red ones; so that all glowing and warm shadows
become too dark. Be assured, nevertheless, that you have in this
photograph, imperfect as it is, a most precious shadow and image of
one of the greatest works ever produced by hand of man: and begin
the study of it piece by piece. If you fancy yourself able to draw at all,
you may begin by practice over and over again the little angular
band on the forehead, with its studs, and the connected chain of
pearls. There are seven pearls and fourteen studs; the fifteenth, a
little larger, at the angle of the transparent cap; and four more,
retiring. They are to be drawn with a fine brush and sepia, measuring
the exact length of the band first; then marking its double curve,
depressed in the centre, and rising over the hair, and then the studs
and pearls in their various magnitudes. If you can’t manage these,
try the spiral of the chair; if not that, buy a penny’s worth of marbles
and draw them in a row, and pick up a snail shell, and meditate upon
it, if you have any time for meditation. And in my Christmas Fors I
will tell you something about marbles, and beads, and coral, and
pearls, and shells; and in time—it is quite possible—you may be able
to draw a boy’s marble and a snail’s shell; and a sea urchin; and a
Doric capital; and an Ionic capital; and a Parthenon, and a Virgin in
[310]it; and a Solomon’s Temple, and a Spirit of Wisdom in it; and a
Nehemiah’s Temple, and a Madonna in it.

This photograph, then, is to be our first domestic possession in

works of art; if any difficulty or improper cost occur in attaining it, I
will name another to answer its purpose; but this will be No. 1 in our
household catalogue of reference: which will never be altered, so
that the pieces may always be referred to merely by their numbers.

Of public, or museum property in art, I have this month laid also the
minute foundation, by the purchase, for our schools, of the
engravings named in the annexed printseller’s account. 9

And respecting the general operation of these schools and of the

museums connected with them, the conclusion, which I am happy to
announce, of the purchase of a piece of ground for the first of them,
for six hundred pounds, requires some small special commentary.
Of such science, art, and literature as are properly connected with
husbandry, (see Note a, p. 210 of this volume,) St. George primarily
acknowledges the art which provides him with a ploughshare,—and
if need still be for those more savage instruments,—with spear,
sword, and armour.

Therefore, it is fitting that of his schools “for the workmen and

labourers of England,” the first should be placed in Sheffield: (I
suppose, originally Sheaf-field; [311]but do not at all rest on that
etymology, having had no time to inquire into it.)

Besides this merely systematic and poetical fitness, there is the

farther practical reason for our first action being among this order of
craftsmen in England; that, in cutler’s ironwork, we have, at this
actual epoch of our history, the best in its kind done by English
hands, unsurpassable, I presume, when the workman chooses to do
all he knows, by that of any living nation.

For these two principal reasons, (and not without further direction
from Fors of a very distinct nature,) I expressed, some time since,
my purpose to place the first museum of the St. George’s Company
at Sheffield.

Whereupon, I received a letter, very well and kindly meant, from Mr.
Bragge, offering me space in the existing Sheffield museum for
whatever I chose to put there: Mr. Bragge very naturally supposing
that this would be the simplest mode of operation for me; and the
most immediately advantageous to the town. To that (as I supposed
private) communication I replied, in what I meant to be a private
letter; which letter Mr. Bragge, without asking my permission, read at
a public dinner, with public comment on what he imagined to be the
state of my health.
Now, I never wrote a letter in my life which all the world are not
welcome to read, if they will: and as Fors would have it so, I am glad
this letter was read [312]aloud, and widely circulated: only, I beg Mr.
Bragge and the other gentlemen who have kindly interested
themselves in the existing Sheffield museum to understand that, had
I intended the letter for publicity, it would have been couched in more
courteous terms, and extended into clearer explanation of my
singular and apparently perverse conduct in what I observe the
Sheffield press, since it has had possession of the letter in question,
characterizes as “setting up an opposition museum at Walkley.”

I am glad to find the Sheffield branch of English journalism

reprobating, in one instance at least, the—I had imagined now by all
acclamation, divine—principle of Competition. But surely, the very
retirement to the solitude of Walkley of which the same journalist
complains, might have vindicated St. George’s first quiet effort in his
own work, from this unexpected accusation,—especially since, in so
far as I can assert or understand the objects of either of the
supposedly antagonist showmen, neither Mr. Bragge nor St. George
intend taking shillings at the doors.

Nevertheless, the impression on the mind of the Sheffield journalist

that museums are to be opened as lively places of entertainment,
rivals for public patronage, and that their most proper position is
therefore in a public thoroughfare, deserves on St. George’s part
some careful answer. A museum is, be it first observed, primarily, not
at all a place of entertainment, but a [313]place of Education. And a
museum is, be it secondly observed, not a place for elementary
education, but for that of already far-advanced scholars. And it is by
no means the same thing as a parish school, or a Sunday school, or
a day school, or even—the Brighton Aquarium.
Be it observed, in the third place, that the word ‘School’ means
‘Leisure,’ and that the word ‘Museum’ means ‘Belonging to the
Muses;’ and that all schools and museums whatsoever, can only be,
what they claim to be, and ought to be, places of noble instruction,
when the persons who have a mind to use them can obtain so much
relief from the work, or exert so much abstinence from the
dissipation, of the outside world, as may enable them to devote a
certain portion of secluded laborious and reverent life to the
attainment of the Divine Wisdom, which the Greeks supposed to be
the gift of Apollo, or of the Sun; and which the Christian knows to be
the gift of Christ. Now, I hear it continually alleged against me, when
I advocate the raising of working men’s wages, that already many of
them have wages so high that they work only three days a week,
and spend the other three days in drinking. And I have not the least
doubt that under St. George’s rule, when none but useful work is
done, and when all classes are compelled to share in it, wages may
indeed be so high, or, which amounts to the same thing as far as our
present object is concerned, time so short, that at least two, if not
three days out of every week, (or an [314]equivalent portion of time
taken out of each day,) may be devoted by some British workmen—
no more to the alehouse, but to, what British clergymen ought to
mean, if they don’t, by the ‘concerns of their immortal souls,’ that is
to say, to the contemplation and study of the works of God, and the
learning that complete code of natural history which, beginning with
the life and death of the Hyssop on the wall, rises to the knowledge
of the life and death of the recorded generations of mankind, and of
the visible starry Dynasties of Heaven.

The workmen who have leisure to enter on this course of study will
also, I believe, have leisure to walk to Walkley. The museum has
been set there, not by me, but by the second Fors, (Lachesis,) on
the top of a high and steep hill,—with only my most admiring
concurrence in her apparent intention that the approach to it may be
at once symbolically instructive, and practically sanitary. [315]

[Contents]

NOTES AND CORRESPONDENCE.

I. The following communication was sent to me on a post-card,

without the writer’s name; but it is worth notice:—

“ ‘Ut et corda nostra mandatis tuis dedita.’ If some manuscript

Breviary has omitted ‘dedita,’ it must be by a slip of the pen. The
sense surely is this: that while there is either war or only an evil and
deceitful peace within, self-surrender to the Divine commandments
above and freedom from terror of foes around are alike impossible.

“In the English Prayer-book ‘set’ has the same meaning as in Psalm
lxxviii. ver. 9 ↗️ (sic: the writer means ver. 8 ↗️); and the context
shows the ‘rest and quietness’ desired, to be rest and quietness of
spirit.”

The ‘context’ cannot show anything of the sort, for the sentence is an
entirely independent one: and the MS. I use is not a Breviary, but the
most perfect Psalter and full service, including all the hymns quoted
by Dante, that I have seen in English thirteenth-century writing. The
omission of the word ‘dedita’ makes not the smallest difference to
the point at issue—which is not the mistranslation of a word, but the
breaking of a clause. The mistranslation nevertheless exists also;
precisely because, in the English Prayer-book, ‘set’ has the same
meaning as in Psalm lxxviii ↗️.; where the Latin word is ‘direxit,’ not
‘dedit’; and where discipline is meant, not surrender.
I must reserve my comments on the two most important letters next
following, for large type and more leisure. [316]

II. “I hope that you will live to see Fors and everything printed without
steam: it’s the very curse and unmaking of us. I can see it dreadfully
in every workman that I come across. Since I have been so happily
mixed up with you these eighteen years, great changes have taken
place in workmen. It was beginning fearfully when I last worked as a
journeyman. One instance among many:—The head foreman came
to me at Messrs. Bakers’, and threatened discharge if he caught me
using a hand bow-saw to cut a little circular disc, which I could have
done in ten minutes. I then had to go and wait my turn at the endless
steam saw—or, as commonly called, a band saw. I had to wait an
hour and a half to take my turn: the steam saw did it in perhaps three
minutes; but the head foreman said, ‘We’ve gone to great expense
for steam machinery, and what is the use if we don’t employ it?’ This
little occurrence was by no means uncommon. What workpeople
have been brought to is beyond conception, in tone of feeling and
character. Here, as I have told you, we do all we can ourselves,
indoors and out; have no servant, but make the children do: and
because we are living in a tidy-sized house, and a good piece of
ground, the labouring people make a dead set against us because
we are not dependent upon them, and have even combined to
defeat us in getting a charwoman now and then. We ought, I
suppose, to employ two servants, whether we can pay for them or
not, or even obtain them (which we couldn’t). They have been
picking hops here next our hedge: this is done by people in the
neighbourhood, not imported pickers; and their children called over
the hedge to ours, and said, ‘Your mother is not a lady; she don’t
keep a servant, but does the work herself.’ I name this little incident
because it seems so deep.”
III. “My dear Mr. Ruskin,—I write to ask leave to come and enter my
name on the Roll of Companions of the Company of [317]St.
George. 10 I have seen enough and read enough of the pace at which
we are going, more especially in business matters, to make me long
to see some effort made to win back some of the honesty and
simplicity of our fathers. And although I am afraid I can be but of very
little use to the Company, I would gladly do anything that lay within
my power; and it would be a great help to feel oneself associated
with others, however feebly, in a practical work.

“I am trying to carry out what you have taught me in business, where

I can do it. Our trade is dressing and buying and selling leather, etc.,
and making leather belting, hose, and boots. I am trying to the
utmost to make everything as good as it can be made, then to ask a
fair price for it, and resist all attempts to cheapen or depreciate it in
any way. First, because the best thing is, as far as I know, invariably
the ‘best value’; secondly, because shoe manufacturing, as now
carried on, is, through the division of labour, a largely mechanical
work, (though far less so than many trades),—and I believe the
surest way of diminishing, as it is surely our duty to do, the amount
of all such work, is to spend no labour, nor allow of its being spent,
on any but the best thing for wear that can be made; and thirdly,
because workmen employed even somewhat mechanically are, I
think, far less degraded by their employment when their work and
materials are good enough to become the subjects of honest pride.
You will understand that, being only in the position of manager of the
business, I can only carry out these ideas to a certain point. Still I
have been able to reduce the amount of what is called ‘fancy
stitching’ on parts of boots, on the stated ground of the injury the
work ultimately causes to the operator’s eyesight. And in the
dressing of some descriptions of leather, where we used to print by
machinery an artificial grain on the skin or hide, we have
[318]dispensed with the process, and work up the natural grain by
hand-power.

“And this brings me to the point I want to put to you about the
permitted use of the sewing machine (see Fors XXXIV., p. 30 ↗️). 11 It
may seem unreasonable, when our firm employs so many. But it
seems to me that the admission of machinery at all is unwise in
principle. Machinery, especially the sewing machine, has
demoralized the shoe trade,—the same I think you would find in all
other trades,—notably in piece-goods for ladies’ dresses—which,
owing to the cheapness with which they can be made up, are far
more in number than they could have been if no sewing machine
had been used. And a manufacturer told me, only the other day, that
common piece-goods, both woollen and others, take as much and
generally more labour in making than the best. If all work required to
supply clothing to the race were to be done by hand, it would be
worth no one’s while to make rubbish of any kind,—the work would
be done by fewer people, and all raw material would be cheapened.

“In your advice to a young lady, printed at page 29, Letter XXXIV ↗️.,
in the third volume of Fors Clavigera, you give her permission to use
a sewing machine. I hope that, on fuller consideration of the subject,
you will advise all who set the weal of their country above their own
convenience, to discontinue its use wherever it can possibly be
dispensed with. [319]

“For the effect of the sewing machine upon the great industries
connected with clothing has been most disastrous.

“Given a certain quantity of cloth, or calico, or leather; and, before it

can be made available as clothing, it must be joined or stitched
together in certain shapes.
“Now so long as this stitching was, of necessity, all done by hand, it
was never worth while, supposing the labour to be paid for at a just
rate, to use any but good materials. A print dress at three-halfpence
per yard, which might wear a week, would cost as much to make as
a dress that would wear a year; and, except for the rich and
luxurious, all extravagance of trimming, and all sewing useless for
wear, were unattainable.

“But with the introduction of the sewing machine a great change took
place. It would be impossible within the limits of a letter to follow it
out in every trade which has felt its influence. But briefly,—when it
was found that the stitching process could be got through, though
less solidly, at a very much reduced cost, it became possible for all
classes to have dresses, clothes, and shoes in far greater number,
and to embody in all kinds of clothing a larger amount of useless and
elaborate work.

“And then arose among manufacturers generally a vigorous

competition,—each one striving, not to make the most enduring and
sound fabric (the best value), but that which, retaining some
appearance of goodness, should be saleable at the lowest price and
at the largest apparent profit.

“The Statutes of the old Trade Guilds of England constantly provide

for the purity of their several manufactures; as did Richard Cœur de
Lion, in his law for the cloth makers, (Fors, Letter III., p. 15 ↗️,)—on
this thoroughly wise and just ground: namely, that the best cloth,
leather, etc., producible, being accurately the cheapest to the
consumer,—the man who used [320]his knowledge of his trade to
make other than the best, was guilty of fraud. Compare this view of
the duty of a manufacturer with modern practice!

“It may be said that the customer is not cheated; since he knows,
when he buys what is called a cheap thing, that it is not the best. I
reply that the consumer never knows to the full what bad value, or
unvalue, the common article is. And whose fault is it that he buys
any but the best value?

“The answer involves a consideration of the duty and position of the

retailer or middleman, and must be given, if at all, hereafter.

“One might multiply instances to show how this kind of competition

has lowered the standard of our manufactures; but here most
readers will be able to fall back upon their own experience.

“Then these common fabrics require for their production always a

larger amount of labour in proportion to their value,—often actually
as much and sometimes more, than would suffice to make an equal
quantity of material of the best value. So that, roughly, when we
demand two common coats where one good one would serve, we
simply require certain of our fellow-creatures to spend double the
necessary time working for us in a mill. That is, supposing we get the
full value out of our two common coats when we have them: the evil
is greater if we fail to do so, and, to gratify our selfishness or caprice,
require three instead of two. And the question arises,—Is it kind or
just to require from others double the needful quantity of such labour
as we would not choose to undergo ourselves? That it is not
Christian so to do, may be learned by any one who will think out to
their far-reaching consequences the words of our Lord: ‘Therefore
all things whatsoever ye would that men should do to you, do ye
even so to them.’ [321]

“Now the use of the sewing machine has been all in favour of the
‘three-coat’ system, indefinitely multiplied and variously
recommended; and the consequent absorption, year by year, of
larger numbers of persons in mechanical toil; toil of the hands only—
numbing to the brain, and blighting to the heart, or maddening to
both.
“So far as the question of clothing is concerned, I would venture to
sum up our duty under present circumstances, broadly, as follows.”
[It can’t possibly be done better.—J. R.]

“Always demand the best materials, and use no more of them than is
necessary to dress yourselves neatly or handsomely, according to
your station in society. Then have these materials made up by hand,
if possible under your own supervision, paying a just price for the
labour. For such ornament as you need to add, remember that it
must be the expression, first of your delight in some work of God’s,
and then, of the human skill that wrought it. This will save you from
ever tampering with the lifeless machine-work; and though you have
little ornament, it will soon be lovely and right.

“Above all, never buy cheap ready-made clothing of any kind

whatsoever; it is most of it stained with blood, if you could see it
aright. It is true you may now buy a ‘lady’s costume,’ made up and
trimmed by the sewing machine (guided by a human one), for the
sum of two shillings and fourpence (wholesale), but you had a great
deal better wear a sack with a hole in it.” [Italics mine.—J. R.] “It may
be worth while hereafter to define with some precision what is the
best value in various kinds of goods; Meantime, should it be
suggested that machine sewing is good enough for common
materials, or for clothes that you intend to wear only a few times, and
then throw aside, remember you have no business to buy any but
good materials, nor to waste when you have bought them; and that it
is worth while to put solid hand-work into such.” [322]

(“I use the word ‘value’ for the strength or ‘availing of a thing towards
life.’ See Munera Pulveris, p. 10.”)

IV. With respect to the next following letter—one which I am heartily

glad to receive—I must beg my readers henceforward, and
conclusively, to understand, that whether I print my correspondence
in large type, or small, and with praise of it, or dispraise, I give
absolutely no sanction or ratification whatever to any
correspondent’s statements of fact, unless by express indication. I
am responsible for my own assertions, and for none other; but I hold
myself bound to hear, and no less bound to publish, all complaints
and accusations made by persons supposing themselves injured, of
those who injure them, which I have no definite reason for supposing
to be false or malicious, and which relate to circumstances affecting
St. George’s work. I have no other means of determining their truth,
than by permitting the parties principally concerned to hear them,
and contradict them, according to their ability; and the wish with
which my present correspondent’s letter closes, to be delivered from
evil speaking and slandering, (she seems not quite clearly to
understand that the prayer in the Litany is to be delivered from the
guilt of these,—not from their effects,) may, so far as these affect her
own family, be much more perfectly accomplished by her own
statement of their true history, than by any investigation possible to
me of the facts in question. But, as far as respects the appeal made
by her to myself, my answer is simply, that, whether made by
patents, ingenuities, or forges, all fortunes whatever, rapidly
acquired, are, necessarily, ill acquired; and exemplary of universal ill
to all men. No man is ever paid largely for ingenuity; he can only be
paid largely by a tax on the promulgation of that ingenuity.

Of actual ingenuities, now active in Europe, none are so utterly

deadly, and destructive to all the beauty of nature and the art of man,
as that of the engineer. [323]

And with respect to what my correspondent too truly urges—the

shame of our ancient races in leaving their houses abandoned—it
does not make me look with more comfort or complacency on their
inhabitation by men of other names, that there will soon be left few
homes in England whose splendour will not be a monument at once
of the guilt of her nobles, and the misery of her people.

“Dear Mr. Ruskin,—We have only just read the September number
of Fors Clavigera. My husband is the Ned G—— referred to in the
letter you quote from E. L. Said he, ‘It (i.e., the letter) is not worth
notice.’ I replied, ‘In itself perhaps not; but I have known Mr. Ruskin
in his writings many years, and I shall write him to put before him the
actual facts, and request him to withdraw these misstatements.’ The
whole letter is written on the supposition that Mr. Green is an iron
king, or iron lord. No such thing: he is an engineer—quite a different
affair; the maker of a patent which is known all over the world as the
‘Fuel Economiser.’ He consequently never had a forge, and is
indebted to the use of his intellect and the very clever mechanical
genius of his father for their rise in life, and not merely to toiling half-
naked Britons, as stated. The picture of the forge, with its foul smoke
and sweltering heat and din, is drawn from some other place, and is
utterly unlike the real workshops of E. Green and Son—costly, airy,
convenient, and erected to ensure the comfort of the workpeople,
having a handsome front and lofty interior.

“As to smoke, the whole concern makes no more than, if as much

as, an ordinary dwelling-house; while we suffer too much at Heath
from the town smoke to add to the dense volumes. We have no
whistle—some other place is meant; we were never possessed of a
‘devil,’ American or English, of any sort. Mr. Green derives no
pecuniary benefit from Wakefield, and but for the attachment of his
father and himself to their birthplace, [324]would long ago have
conducted his operations in a more central spot.

“Several other grave charges are brought against Mr. Green—one so

serious that I am surprised to see it printed: viz., that he rules his
people with an iron hand. That may go with the rest of the ‘iron tale.’
Your correspondent is either very ignorant or wilfully false. No such
assertion can be for a moment sustained, after inquiry is made
among our people; nor by any one in the town could an instance of
such be proved.

“As to the Scotch estate, Mr. Green does not possess one.

“The history of Robin the Pedlar is equally a work of E. L.’s

imagination, although no false shame as to a humble descent has
ever been shown or felt. What! you taunt a man because he and his
father have risen above the state in which they were born by use of
the intellect God gives them? Fie! What sort of encouragement do
you give to the working men to whom you address these letters,
when you insinuate that one sprung from the people has no right to
dwell in a hall or drive a carriage; and broadly hint he is no
gentleman, no scholar, and has nothing to boast of but his money?
Come here, and see if Ned G—— is the sort of man you picture; see
the refinement visible in his idea of art, and which he has tried to
impress on others by his example, and then ask yourself whether
you have done well to lend the sanction of your name to decry, as a
mere vulgar parvenu, one who has done his best to keep a high
standard before him.

“As to living at Heath Hall, I ask, Is it a crime to spend your money in

preserving to posterity a beautiful specimen of the house, of the
smaller gentry in Queen Elizabeth’s time, which you only enjoy
during a few years’ lease? A little longer neglect, and this fine old
house would have become a ruin: when we took it, ivy grew inside,
and owls made their nests in what are now guest-chambers.

“No squire has lived here for a century and a quarter; and the
[325]last descendant of the venerated Lady B——, (Dame Mary
Bolles, that is,) utterly refused to reside near so dull a town as
Wakefield—preferring Bath, then at the height of its glory and Beau
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