Accounting in France (RLE Accounting)
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information. How do produced quantities influence the costs per unit? How can costs, calculated at different times, be compared? What is the best way to distribute the overheads? etc.. .. After the setting up of the accounting system, a long process of maturation began. This is evident, on the one hand, from the discussions of the Board of Directors and, on the other hand from the differences between the two sets of accounts approved by the Board of Directors in 1832 and 1872. The structure of the Com pany evolved considerably between 1832 and 1880: two mergers occurred, the first one in 1858 with Saint-Quirin, a glass manufac turer, and the second one in 1872 with Perret-Olivier, whose fields of activity were mining and chemistry. After the second merger, the sales figures for chemistry outstripped the sales of glass and mirrors and during this time the Company had grown to include 16 branches in France and Germany. DISCUSSIONS ON INDUSTRIAL ACCOUNTING All the questions dealing with the setting up of a management accounting system were discussed by the Boards of Directors. In most cases, the solutions were only practical ones. There never seemed any intent or desire by the Company to make any theory or any generalization of those practical solutions. Direct and indirect costs. The distinction between direct and indirect cost was made first in 1829 with regards to labor charges.9 Salaries, of which a comprehensive list is given above, will be separated into two groups: 1) Those concerning directly and specially with the manufacturing process. 2) Those concerning administration. At the end of the year, the former will be divided and included in the suitable items of expenses; then the latter will be included in the overheads. However, direct labor is likely to have included only the wages of workers having a permanent job, and excluded those of the day laborer, which are by their very nature fluctuating. In the soda factory, the majority of workers were day laborers, thus making it difficult to estimate precisely the ratio between direct and indirect labor charges. Production level and cost per unit. In the previously quoted chief accountant’s report concerning the financial year 1827-1828,
vinced that we should not, because I am certain that the lead chambers, considering of the huge quantity of sulfur burned inside, won’t last more than 6 years instead of 15, as formerly forecasted. If that fact is confirmed, deprecia tion is not important enough and the profit of the soda factory is overvalued. Though the Board of Directors at the September 4, 1834 meeting was not asked for a decision as regards the length of time allowed for depreciation, it was asked to decide whether deprecia tion should be taken on machinery during the first year's service. In the same report, the chief accountant maintains the fictitious nature of the depreciation taken into account: . . . let me remind you of what I told you in my preceding report: there is only one means to have an exact idea of depreciation: it consists, when a building or a piece of machinery is out of use, in appraising its value, and when it is destroyed to take into the Profit and Loss Account the remaining value, less the selling price of materials. By that means we could know exactly the depreciation life of a building or a piece of machinery . . . The method of calculating depreciation was to be completely re viewed in the 1870’s as discussed in a subsequent section. Transfer pricing among factories. Transfer pricing also became an issue which was considered by the Company in developing its cost accounting system. The issue arose because the soda factory sold its products to the glass factory on the one hand, and to external customers on the other hand. It first seemed correct to use the same price until this price appeared excessive due to ap proximate methods of valuing the quality of goods sold: If that increase in the degrees (measure of quantity for soda) is of little importance for customers delivered to in Paris, it is quite different for the Saint-Gobain’s branch which pays for more degrees than it really gets. Conse quently, the soda factory makes a profit to the detriment of the glass factory and increases its cost prices. To conclude, the chief accountant makes some proposals among which: 3) Wouldn't it be convenient to choose a uniform way of costing as regards the transfer transactions between our branches? We could use either the cost price or the mar ket price.
account was developed from an analysis of the various elements to be accounted for. The logic that prevailed in the selection of the order of presentation of charges was based on the distinction be tween the major economic and financial operations usually con ducted by the firm. First, production operations necessitate the purchase of material, the payment of wages to employees and of taxes to the state, and the incurring of various operating expenses. Next, a category was created to register financial charges resulting from the firm’s financing policy. Finally, a category was devoted to the cost of permanent productive means related to the period: depreciation of fixed assets. On the revenue side of the trading account, resources coming from the sale of production or pur chased goods were shown first, since they result from the primary activity of the firm. Next, sales revenues from two secondary sources were shown in separate categories. Production by the firm of its own fixed assets, which was considered revenue since it represented a transfer of charges to the balance sheet, also ap peared under a separate heading. Finally, a category was allocated to revenues from financial operations such as interest and divi dends. Aside from financial accounting provisions, the plan con tained an important section on cost accounting. As mentioned earlier in the case of the CNOF Plan, to maximize both the stan dardization of financial accounting and the flexibility and adapt ability of the cost accounting system, the plan reserved a separate class for cost accounts, number 9. Separation of cost accounting also favored the progressive introduction of cost accounting, with out delaying the application of the financial accounting section of the plan. The role assigned to cost accounting by the plan was threefold, including the periodic determination of: 1. The cost of manufactured or purchased products; 2. Inventories, using the perpetual inventory method; 3. The results of operations by each branch or subdivision of the firm's activities In the general plan, a main structure for industrial accounting was prescribed, leaving the problem of application to particular cases to company plans. Two measures ensured the flexibility and adaptability of the plan. First of all, the use of the decimal system meant that any account could be subdivided by adding extra digits to the account number. Secondly, the free accounts left in the general plan could be used to fill specific needs. 294
separate double-entry system. Separation of cost accounting from financial accounting was believed to be essential. The reasons that were given then for this separation seem still valid today in view of the maintenance of the same practice in the 1982 Accounting Plan. The most important justifications were the following: 1. It facilitated the establishment and further modification of the cost accounting system; 2. In cases where there were modifications in production or in the company structure, the cost accounts could be adapted without modifying the plan for financial ac counting, thus preserving the inter-firm comparability of the financial information, as well as its comparability over time; 3. Charges included in product prices could differ from ex penditures registered in financial accounting; 4. The use of contra-accounts allowed complete freedom in cost accounting; the transformation of data for the compu tation of product prices and the determination of results of operations could thus be done freely without altering the original accounts [CNOF, 1947, pp. 32-34, 99]. The CNOF Plan was very well designed; however, to preserve the recent tradition introduced by the 1942 Plan, only some of its features were retained in the 1947 Plan. The influence of the CNOF Plan and of the 1942 Plan on the 1947 Plan will be consid ered after introducing the latter. THE 1947 ACCOUNTING PLAN As the first official plan drafted after the Liberation, the 1947 Plan constituted the real beginning of accounting normalization in France. It was initially designed for industrial and commercial undertakings, but with the intention of adapting the plan to all sectors of the economy. The ultimate goal of the Committee for the Normalization of Accounting was to create a system that would allow the summation of the accounts of all economic units, thereby facilitating the preparation of national accounts. The Committee was headed by its vice-president, Turpin, who was secretary of the Central Committee for Prices. The secretary of the Committee was Pujol, a state economic expert and former secretary of the adaptation committee for the 1942 Plan. Among the sub-committees that were formed to work on specific topics, the three most important ones were the sub-committee on prin ciples, definitions and rules, headed by Fourastie and Lauzel; the
Models for the balance sheet, the trading account and the profit and loss account; 8. A section on cost accounting, including a description of the system adopted, terminology, rules for computing product costs, an explanation of the perpetual inventory method and the procedure for the classification of expenses into fixed and variable categories; 9. Statistical accounts necessary to analyze the company's situation and establish a national accounting system (see point 4 in the previous section). General Features of the 1947 Plan The plan offered a simple, logical and flexible structure, while introducing the most advanced cost accounting techniques of the time (the homogeneous sections method described earlier). Termi nology and presentation were largely borrowed from the account ing tradition. The chart of accounts (see Appendix) classes were chosen in accordance with the two traditional objectives of finan cial accounting: the determination of the firm’s situation and the analysis of the year's results. The plan used the decimal system to number accounts and classes of accounts. The main classes of the plan were as follows: Balance 1. Permanent capital (capital, reserves, liabili-sheet ties); accounts 2. Fixed assets and investments; 3. Stocks; 4. Third-party accounts (receivables and payables); 5. Financial accounts (short-teim loans and borrowing, short-term investments, cash); Operating 6. Expenses, classified by type; accounts 7. Revenues, classified by type; 8. Profit and Loss accounts; 9. Cost accounting accounts; 10. Statistical accounts. This structure made it easy to prepare the balance sheet which was established from the accounts of the first five classes. Unlike the 1942 Plan, the order of appearance of the accounts on the balance sheet was the same as in the chart of accounts. Ac counts were first classified according to the duration of use or realizability for assets (short or long-term) and according to the
Everything is included in such a calculation, everything can be summed up to that result; we find in it the effects of the chemical, mechanical, physical process, the advan tages of activity and workforce discipline, and finally the effect of every resource, of all sorts of economic means, particularly that of a lower capital producing as much or more. The evaluation of each Company, that is to say its contribution to the association, will result from that cost, or return, combined with the number of squarefoot pro duced, and with the effective selling price, including of course the quality or the degree of perfection of products. What happened meanwhile in the economic field? Which fac tors were strong enough to lead to such a systematic calculation? The conditions of production had slightly evolved in that period, but the main change came from outside the firm. Between 1793 and 1829, the dates of the two preceding quotations, the Company's Privilege disappeared and something new emerged: competition. The upheavals resulting from the Industrial Revolution seemed to have led to the widespread acceptance of cost calcula tions as the only efficient means to compare the activities of com peting firms. This is particularly true for firms that did not have any competition before 1790. Moreover, one can observe that in dustrial accounting and cost accounting books appeared in France from 1817 onwards, and can find several authors of that period saying: “I am the very first to find a new approach to the prob lem."6 THE SETTING UP OF THE NEW ACCOUNTING SYSTEM (1820-1834) The proceedings of the Board of Director’s meetings have been preserved; from these it is apparent that a new accounting system began in 1820. However, the actual accounting records from before 1825 have not survived. From the 1825 accounting records, it is clear that there is a new system of reporting which was long in being developed; a Profit and Loss Account was pre-
ing if one remembers that the Industrial Revolution started in France a few decades after England. But several authors [Levy-Leboyer, 1968; Asselain, 1984; and Keyder & O'Brien, 1978] ex plain that the French economy always kept up with technological progress in Great-Britain. A massive deceleration in the economy occurred between 1790 and 1810; the French industrial produc tion, which was probably equivalent in volume to the English one in 1790, was reduced to a much lower level in 1810. However, a new start occurred after 1810 and the two countries had parallel industrial growths all through the 19th century. Cost accounting systems may have appeared around the turn of and after the 15 th century in Europe [Gamer, 1954]. They actually spread to most firms during the industrial revolution in the 19th century; first in England, then in France, then in the USA, and in Germany. The aim of the present article is to describe the creation and development of such an industrial accounting system at Cie Saint-Gobain. This paper discusses the development of accounting by this very old company (created in 1665) between 1820, when it abandoned single entry bookkeeping, and 1880, when it achieved a full cost system. When examining the archives, this researcher saw no evidence that the textbooks mentioned above were read by anyone at Saint-Gobain. HISTORICAL BACKGROUND OF SAINT-GOBAIN: THE ROYAL MANUFACTURE AND THE PRIVILEGE Instead of continuing to buy glass from Venice, which was too much for the finances of the French kingdom, Colbert encouraged the foundation of a Manufacture Royale des Glaces, established in Rue Reuilly in Paris. The creation and development of the Com pany resulted from privileges granted by the monarch to business men successively in 1665, 1683, 1688, 1695, 1702, 1757 and 1785. Those privileges made the firm a hybrid one, depending both on public and private laws; on the one hand it had a privilege and on the other hand the legal statutes of a limited Company [Pris, 1973, p. 26]. Having a privilege meant industrial, commercial, fiscal, ad ministrative, juridical and financial advantages such as exemption of taxes, free circulation for goods bought and sold, and a prohibi tion for anyone to sell the same kind of product. Saint-Gobain was therefore protected from possible rivals and all those years of 194
