JOSIAH WEDGWOOD AND THE GENESIS OF MODERN COST ACCOUNTING

The Industrial Revolution dramatically increased per capita production through mechanization. Eighteenth century England was changed from an agrarian and craft-based society to an industrial power.

Josiah Wedgwood (1730-1795) is well known as a potter and as grandfather of Charles Darwin. His research of materials, use of skilled labor and successful business organization made him a leader of the Industrial Revolution. At a time known for the craft of pottery, Wedgwood became a pottery manufacturer, a pioneer in production. He established his first pottery works in 1759, beginning with improved cream coloredearthenware later called "queensware".

Josiah Wedgwoodinitially made little use of accounting. High prices were charged resulting in substantial profits even though costs were poorly tracked. The circumstances changed with the depression of 1772 demand dropped, inventories rose, and prices were cut. Could he cut costs enough to avoid bankruptcy? His answer involved understanding cost accounting in enough detail to make informed decisions. An early discovery was a history of embezzlementby his head clerk, when the accounts didn't agree. A new clerk was quickly installed and a weekly accounting implemented.

Wedgwood was able to determine costs for materials and labor for each manufacturing step for each product. An attempt was made to allocate such overhead costs as breakage and interest as well as transportation costs. He discovered that certain products cost considerably more than others to manufacture, with a correspondent effect on prices and therefore profit. He also became aware of both the concepts of economies of scale and sunk costs. The large percent of fixed costs suggested the importance of greater overall volume.

Based on his cost analysis, the high price policy for pottery was changed. Lower prices could be charged differentially, increasing both demand for some products and greater overall profit. Demand became key to policies. The market could be divided between high-price high-quality products for richer customers, while a mass market could be appealed to with lower-cost lower-price products.

The cost system influenced wages paid, types of employees (e.g., apprentices were paid about one third of experienced workers and were efficient for certain tasks), amount of products produced, and specific techniques used. Prices were based on relative costs, demand, and how demand could be stimulated. Because of his pioneering accounting system Wedgwood survived, unlike hundreds of his contemporaries (only 10% of Industrial Revolution firms survived through the 1840s). In fact, the company he founded is still in business.