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 Preface vii

Acknowledgments
William Vatter and George Benston motivated my interest in managerial accounting. 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 sharpened my analytical skills and further refined the approach. He also fur-
nished most of the intellectual capital for Chapter 3, including the problem material. Ray
Ball has been a constant source of 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 n­ umerous
instructors. I wish to thank Mahendra Gupta, Susan Hamlen, Badr Ismail, Charles Kile,
Leslie Kren, Don May, William Mister, Mohamed Onsi, Ram Ramanan, Stephen Ryan,
Michael Sandretto, Richard Sansing, Deniz Saral, Gary Schneider, Joe Weber, and
­William Yancey. This book also benefited from two other projects with which I have been
involved. Writing Managerial Economics and Organizational Architecture (McGraw Hill
Education, 2016) with James Brickley and Clifford Smith and Management Accounting
in a Dynamic Environment (Routledge, 2016) with Cheryl McWatters helped me to better
understand how to present certain topics.
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 Sand-
ers, 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 Steven Huddart

Howard M. Armitage James M. Emig Robert Hurt
Vidya Awasthi Gary Fane Douglas A. Johnson
Kashi Balachandran Anita Feller Lawrence A. Klein
Da-Hsien Bao Tahirih Foroughi Thomas Krissek
Ron Barden Ivar Fris A. Ronald Kucic
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
viii Preface

Frank Probst Richard Saouma Clark Wheatley

Kamala Raghavan Arnold Schneider Lourdes F. White
William Rau Henry Schwarzbach Paul F. Williams
Jane Reimers Elizabeth J. Serapin Robert W. Williamson
Thomas Ross Norman Shultz Peggy Wright
Harold P. Roth James C. Stallman Jeffrey A. Yost
P. N. Saksena William Thomas Stevens S. Mark Young
Donald Samaleson Monte R. Swain
Michael J. Sandretto Heidi Tribunella

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 22
3 Opportunity Cost of Capital and Capital Budgeting 85
4 Organizational Architecture 127
5 Responsibility Accounting and Transfer Pricing 161
6 Budgeting 216
7 Cost Allocation: Theory 280
8 Cost Allocation: Practices 327
9 Absorption Cost Systems 392
10 Criticisms of Absorption Cost Systems: Incentive to Overproduce 448
11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs 483
12 Standard Costs: Direct Labor and Materials 538
13 Overhead and Marketing Variances 575
14 Management Accounting in a Changing Environment 609

Solutions to Concept Questions 655

Glossary 665
Index 675

ix
 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   8
D. Management Accountant’s Role in the Organization   9
E. Evolution of Management Accounting: A Framework for Change   12
F. Vortec Medical Probe Example   15
G. Outline of the Text   18
H. Summary  18

2 The Nature of Costs   22

A. Opportunity Costs  23
1. Characteristics of Opportunity Costs   24
2. Examples of Decisions Based on Opportunity Costs   24
B. Cost Variation  29
1. Fixed, Marginal, and Average Costs   29
2. Linear Approximations  31
3. Other Cost Behavior Patterns   33
4. Activity Measures  33
C. Cost–Volume–Profit Analysis  35
1. Copier Example  35
2. Calculating Break-Even and Target Profits   36
3. Limitations of Cost–Volume–Profit Analysis   39
4. Multiple Products  41
5. Operating Leverage  42
D. Opportunity Costs versus Accounting Costs   45
1. Period versus Product Costs   46
2. Direct Costs, Overhead Costs, and Opportunity Costs   46
E. Cost Estimation  48
1. Account Classification  49
2. Motion and Time Studies   49
F. Summary  49
Appendix: Costs and the Pricing Decision   50

3 Opportunity Cost of Capital and Capital Budgeting   85

A. Opportunity Cost of Capital   86
B. Interest Rate Fundamentals   89
1. Future Values  89
2. Present Values  90
x
Contents xi

3. Present Value of a Cash Flow Stream   91

4. Perpetuities  92
5. Annuities  93
6. Multiple Cash Flows per Year   94
C. Capital Budgeting: The Basics   96
1. Decision to Acquire an MBA   96
2. Decision to Open a Day Spa   97
3. Essential Points about Capital Budgeting   98
D. Capital Budgeting: Some Complexities   99
1. Risk  99
2. Inflation  100
3. Taxes and Depreciation Tax Shields   102
E. Alternative Investment Criteria   104
1. Payback  104
2. Accounting Rate of Return   105
3. Internal Rate of Return (IRR)   107
4. Methods Used in Practice   110
F. Summary  110

4 Organizational Architecture  127
A. Basic Building Blocks   128
1. Self-Interested Behavior, Team Production, and Agency Costs   128
2. Decision Rights and Rights Systems   133
3. Role of Knowledge and Decision Making   134
4. Markets versus Firms   135
5. Influence Costs  137
B. Organizational Architecture  139
1. Three-Legged Stool  139
2. Decision Management versus Decision Control   143
C. Accounting’s Role in the Organization’s Architecture   145
D. Example of Accounting’s Role: Executive Compensation Contracts   147
E. Summary  148

5 Responsibility Accounting and Transfer Pricing   161

A. Responsibility Accounting  162
1. Cost Centers  163
2. Profit Centers  165
3. Investment Centers  166
4. Economic Value Added (EVA®)  170
5. Controllability Principle  173
B. Transfer Pricing  175
1. International Taxation  175
2. Economics of Transfer Pricing   177
3. Common Transfer Pricing Methods   181
4. Reoragnization: The Solution if All Else Fails   186
5. Recap  186
C. Summary  188
xii Contents

6 Budgeting  216
A. Generic Budgeting Systems   219
1. Country Club  219
2. Large Corporation  222
B. Trade-Off between Decision Management and Decision Control   226
1. Communicating Specialized Knowledge versus Performance
Evaluation  226
2. Budget Ratcheting  227
3. Participative Budgeting  229
4. New Approaches to Budgeting   230
5. Managing the Trade-Off   232
C. Resolving Organizational Problems   233
1. Short-Run versus Long-Run Budgets   233
2. Line-Item Budgets  235
3. Budget Lapsing  236
4. Static versus Flexible Budgets   236
5. Incremental versus Zero-Based Budgets   239
D. Summary  241
Appendix: Comprehensive Master Budget Illustration   242

7 Cost Allocation: Theory   280

A. Pervasiveness of Cost Allocations   281
1. Manufacturing Organizations  283
2. Hospitals  284
3. Universities  284
B. Reasons to Allocate Costs   286
1. External Reporting/Taxes  286
2. Cost-Based Reimbursement  287
3. Decision Making and Control   288
C. Incentive/Organizational Reasons for Cost Allocations   289
1. Cost Allocations Are a Tax System   289
2. Taxing an Externality   290
3. Insulating versus Noninsulating Cost Allocations   296
D. Summary  299

8 Cost Allocation: Practices   327

A. Death Spiral  328
B. Allocating Capacity Costs: Depreciation   333
C. Allocating Service Department Costs   333
1. Direct Allocation Method   335
2. Step-Down Allocation Method   337
3. Service Department Costs and Transfer Pricing of Direct
and Step-Down Methods   339
4. Reciprocal Allocation Method   342
5. Recap  344
D. Joint Costs  344
Contents xiii

1. Joint Cost Allocations and the Death Spiral   346

2. Net Realizable Value   348
3. Decision Making and Control   352
E. Segment Reporting and Joint Benefits   353
F. Summary  354
Appendix: Reciprocal Method for Allocating Service Department Costs   354

9 Absorption Cost Systems   392

A. Job Order Costing   394
B. Cost Flows through the T-Accounts   396
C. Allocating Overhead to Jobs   398
1. Overhead Rates  398
2. Over/Underabsorbed Overhead  400
3. Flexible Budgets to Estimate Overhead   403
4. Expected versus Normal Volume   406
D. Permanent versus Temporary Volume Changes   410
E. Plantwide versus Multiple Overhead Rates   411
F. Process Costing: The Extent of Averaging   415
G. Summary  416
Appendix A: Process Costing   416
Appendix B: Demand Shifts, Fixed Costs, and Pricing   422

10 Criticisms of Absorption Cost Systems:

Incentive to Overproduce   448
A. Incentive to Overproduce   450
1. Example  450
2. Reducing the Overproduction Incentive   453
B. Variable (Direct) Costing   454
1. Background  454
2. Illustration of Variable Costing   454
3. Overproduction Incentive under Variable Costing   457
C. Problems with Variable Costing   458
1. Classifying Fixed Costs as Variable Costs   458
2. Variable Costing Excludes the Opportunity Cost of Capacity   460
D. Beware of Unit Costs   461
E. Summary  463

11 Criticisms of Absorption Cost Systems: Inaccurate

Product Costs  483
A. Inaccurate Product Costs   484
B. Activity-Based Costing  488
1. Choosing Cost Drivers   489
2. Absorption versus Activity-Based Costing: An Example   495
C. Analyzing Activity-Based Costing   499
1. Reasons for Implementing Activity-Based Costing   499
2. Benefits and Costs of Activity-Based Costing   501
3. ABC Measures Costs, Not Benefits   503
D. Acceptance of Activity-Based Costing   505
E. Summary  509
xiv Contents

12 Standard Costs: Direct Labor and Materials   538

A. Standard Costs  539
1. Reasons for Standard Costing   540
2. Setting and Revising Standards   541
3. Target Costing  545
B. Direct Labor and Materials Variances   546
1. Direct Labor Variances   546
2. Direct Materials Variances   550
3. Risk Reduction and Standard Costs   554
C. Incentive Effects of Direct Labor and Materials Variances   554
1. Build Inventories  555
2. Externalities  555
3. Discouraging Cooperation  556
4. Mutual Monitoring  556
5. Satisficing  556
D. Disposition of Standard Cost Variances   557
E. The Costs of Standard Costs   559
F. Summary  561

13 Overhead and Marketing Variances   575

A. Budgeted, Standard, and Actual Volume   576
B. Overhead Variances  579
1. Flexible Overhead Budget   579
2. Overhead Rate  580
3. Overhead Absorbed  581
4. Overhead Efficiency, Volume, and Spending Variances   581
5. Graphical Analysis  585
6. Inaccurate Flexible Overhead Budget   587
C. Marketing Variances  588
1. Price and Quantity Variances   588
2. Mix and Sales Variances   589
D. Summary  591

14 Management Accounting in a Changing Environment   609

A. Integrative Framework  610
1. Organizational Architecture  611
2. Business Strategy  612
3. Environmental and Competitive Forces Affecting Organizations   615
4. Implications  615
B. Organizational Innovations and Management Accounting   616
1. Total Quality Management (TQM)   616
2. Just-in-Time (JIT) Production   621
3. Six Sigma and Lean Production   624
4. Balanced Scorecard  626
C. When Should the Internal Accounting System Be Changed?   632
D. Summary  633
Solutions to Concept Questions   655
Glossary  665
Index  675
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
automobiles. 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 to use. For example, they must determine which
models will have leather seats and the quality of the leather to be used. Similarly, in decid-
ing 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, manag-
ers must have good information to make all these decisions and the leadership abilities to
get others to implement the decisions.
Information about firms’ future costs and revenues is not readily available but must be
estimated by managers. Organizations must obtain and disseminate the knowledge to make
these decisions. Organizations’ internal information systems provide some of the knowledge
for these pricing, 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, integrated 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 corporations
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 managers 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 necessarily 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.
Nonprofits do not have owners with the legal rights to the organization’s profits. ­Moreover,
nonprofits seek to maximize their value by serving some social goal such as education or
health care.
Introduction 3

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.
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.1
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 motivate
and monitor people in organizations (control). The most basic control use of accounting is
to prevent fraud and embezzlement. Maintaining inventory records helps reduce employee
theft. Accounting budgets, discussed more fully in Chapter 6, provide an example of both
decision making and control. Asking each salesperson in the firm to forecast his or her sales
for the upcoming year is useful for planning next year’s production (decision making).
However, if the salesperson’s sales forecast is used to benchmark performance for compen-
sation purposes (control), he or she has strong 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 usually sacrificed to provide better motivation (control). The
trade-off between providing knowledge for decision making and motivation/control arises
continually 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 a­ ccounting.

1
Control refers to the process that helps “ensure the proper behaviors of the people in the organization.
These behaviors should be consistent with the organization’s strategy,” as noted in K. Merchant, Control in
Business Organization (Boston: Pitman Publishing Inc., 1985), p. 4. Merchant provides an extensive ­
discussion of control systems and a bibliography. In Theory of Accounting and Control (Cincinnati,
OH: South-Western Publishing Company, 1997), S. Sunder describes control as mitigating and resolving
­conflicts among ­employees, owners, suppliers, and customers that threaten to pull organizations apart.
4 Chapter 1

A survey of senior-level executives (chief financial officers, vice presidents of finance,

controllers, etc.) asked them to rank the importance of various goals of their firm’s account-
ing system. Eighty percent of the respondents reported that cost management (controlling
costs) was a significant goal of their accounting system and was important to achieving
their company’s overall strategic objective. Another top priority of their firm’s account-
ing system, even higher than cost management or strategic planning, is internal reporting
and performance evaluation. These results indicate that firms use their internal accounting
system both for decision making (strategic planning, cost reduction, financial manage-
ment) and for controlling behavior (internal reporting and performance evaluation).2
The firm’s accounting system is very much a part of the fabric that helps hold the
organization together. It provides knowledge for decision making, and it provides informa-
tion 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 reducing organizational prob-
lems. A firm’s internal 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
­elements. However, understanding managerial accounting requires addressing the behav-
ioral 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.
An internal accounting system should have the following characteristics:
1. Provide the information necessary 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. (In some
instances, these latter considerations dominate the first three.)
5. Contribute more to firm value than it costs.

2
Ernst & Young and IMA, “State of Management Accounting,” www.imanet.org/pdf/SurveyofMgtAcctingEY
.pdf, 2003.
 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

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 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.3
As firms expand into international markets, external users of the firm’s financial state-
ments become global. No longer are the firm’s shareholders, tax authorities, and regula-
tors 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 making
as well as control of organizational problems. As discussed earlier, managers use a vari-
ety of sources of data for making decisions. The internal accounting system provides one

3
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. When two systems are being used to measure the same underlying
event, people can forget which system is being used.
SOURCE: A. Pollack, “Two Teams, Two Measures Equaled One Lost Spacecraft,” The New York Times. October 1, 1999, p. 1.

i­mportant source. These internal reports are also used to evaluate and motivate (control)
the behavior of managers in the firm. The internal accounting system reports on manag-
ers’ performance and therefore provides incentives for them. Any changes to the internal
accounting system can affect all the various uses of the resulting accounting numbers.
The internal and external reports are closely linked. The internal accounting 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 com-
pany. For example, the internal accounting system computes the unit cost of individual
products as they are 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.
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 technol-
ogy have reduced some of the costs of maintaining multiple accounting systems. However,
confusion 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 system 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 con-
cept are produced, the natural tendency is to explain (i.e., reconcile) the differences.
­Managers involved in this reconciliation could have used this time in more productive
ways. Also, using the same accounting system for multiple purposes increases the
­credibility of the financial reports for each purpose.4 With only one accounting system,
the ­external auditor monitors the internal reporting system at little or no additional cost.

4
A. Christie, “An Analysis of the Properties of Fair (Market) Value Accounting,” in Modernizing U.S.
S­ ecurities Regulation: Economic and Legal Perspectives, K. Lehn and R. Kamphuis, eds. (Pittsburgh, PA:
­University of Pittsburgh, Joseph M. Katz Graduate School of Business, 1992).
 Introduction 7

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.

Interestingly, 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 every-
thing that we have underneath—in terms of the detailed reporting—also rolls up basically
to the same story that we’ve told externally.”5 Nothing prevents firms from using separate
accounting systems for internal decision making and internal performance evaluation
except the confusion 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 num-
ber, 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 attri-
butes and derive different cost numbers for different decisions. For example, if the publisher
is considering translating this book into Chinese, not all the components 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 won’t beat riders on specialized bikes
designed for just one type of 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?

5
Dichev, I.D., Graham, J.R., Campbell, H., and Rajgopal, S., 2013. “Earnings quality: evidence from the
field,” Journal of Accounting and Economics, 56 (2–3), pp. 1–33.
8 Chapter 1

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.6 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 moving
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
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 search-
ing 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 are useful in 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.
Firms cannot survive by making more mistakes than their competitors.7

Terminology: Benchmarking is defined as a “process of continuously comparing and measur-

Benchmark- ing an organization’s business processing against business leaders anywhere in the
ing and world to gain information which will help the organization take action to improve its
Economic performance.”
Darwinism Economic Darwinism predicts that successful firm practices will be imitated.
Benchmarking is the practice of imitating successful business practices. The practice
of benchmarking dates back to 607, when Japan sent teams to China to learn the best
practices in business, government, and education. Today, most large firms routinely
conduct benchmarking studies to discover the best business practices and then imple-
ment them in their firms.
SOURCE: Society of Management Accountants of Canada, Benchmarking: A Survey of Canadian Practice (Hamilton,
Ontario, Canada, 1994).

6
This example is suggested by J. McGee, “Predatory Pricing Revisited,” Journal of Law & Economics.
XXIII (October 1980), pp. 289–330.
7
See A. Alchian, “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy. 58
(June 1950), pp. 211–21.
 Introduction 9

Economic Darwinism suggests that in successful (surviving) firms, things should not
be fixed unless they are clearly broken. Currently, considerable attention is being directed
at revising and updating firms’ internal accounting systems because many managers
believe their current accounting systems are “broken” and require major overhaul. Alter-
native 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 man-
agers in organizations, thereby aligning managers’ and owners’ interests.
Although internal accounting systems may appear to have certain inconsistencies with
some particular theory, these systems (like the bears searching for marmots) have survived
the test of time and therefore are likely to be yielding unobserved benefits (like claw sharp-
ening). This book discusses these additional benefits. Two caveats must be raised concern-
ing 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.
The fact that most managers use their accounting system as the primary formal infor-
mation system suggests that these accounting systems are yielding total benefits that
exceed their total costs. These benefits include financial and tax reporting, providing infor-
mation for decision making, and creating internal incentives. The proposition that surviv-
ing firms have efficient accounting systems does not imply that better systems do not exist,
only that they have not yet been discovered. It is not necessarily the case that what is, is
optimal. Economic Darwinism helps identify the costs and benefits of alternative internal
accounting systems and is applied repeatedly throughout the book.

Historical The well-known Italian Medici family had extensive banking interests and owned tex-
Application: tile plants in the fifteenth and sixteenth centuries. They also used sophisticated cost
Sixteenth- records to maintain control of their cloth production. These cost reports contained
Century detailed data on the costs of purchasing, washing, beating, spinning, and weaving the
Cost Records wool, of supplies, and of overhead (tools, rent, and administrative expenses). Modern
costing methodologies closely resemble these fifteenth-century cost systems, suggest-
ing they yield benefits in excess of their costs.
SOURCE: P. Garner, Evolution of Cost Accounting to 192. (Montgomery, AL: University of Alabama Press, 1954), pp.
12–13. Original source R de Roover, “A Florentine Firm of Cloth Manufacturers,” Speculu. XVI (January 1941), pp. 3–33.

D. Management Accountant’s Role in the Organization

To better understand internal accounting systems, it is useful to describe how firms orga-
nize their accounting functions. No single organizational structure applies to all firms.
­Figure 1–2 presents one common organization chart. The design and operation of the
internal and external accounting systems are the responsibility of the firm’s chief financial
­officer. The firm’s line-of-business or functional areas, such as marketing, manufacturing,
10 Chapter 1

FIGURE 1–2
Board of Directors
Organization
chart for a typical
corporation
President and Chief
Executive Officer (CEO)

Operating Human Chief Financial

Legal Other
Divisions Resources Officer (CFO)

Controller–
Internal
Operating Treasury Controller
Audit
Divisions

Financial Cost
Tax
Reporting Accounting

and research and development, are combined and shown under a single organization, “oper-
ating divisions.” The remaining staff and administrative functions include human resources,
chief financial officer, legal, and other. In Figure 1–2, the CFO oversees all the financial
and accounting functions in the firm and reports directly to the president. The CFO’s three
major functions include controllership, treasury, and internal audit. Controllership involves
tax administration, the internal and external accounting reports (including statutory filings
with the Securities and E­ xchange Commission if the firm is publicly traded), and the plan-
ning and control systems (including budgeting). Treasury involves short- and long-term
financing, banking, credit and collections, investments, insurance, and capital budgeting.
Depending on their size and structure, firms organize these functions differently. F
­ igure 1–2
shows the internal audit group reporting directly to the CFO. In other firms, internal audit
reports to the controller, the chief executive officer (CEO), or the board of directors.
The controller is the firm’s chief management accountant and is responsible for data
collection and reporting. The controller compiles the data to prepare the firm’s balance
sheet, income statement, and tax returns. In addition, this person prepares the internal
reports for the various divisions and departments within the firm and helps the other man-
agers by providing them with the data necessary to make decisions—as well as the data
necessary to evaluate these managers’ performance.
Usually, each operating division or department has its own controller. For example, if
a firm has several divisions, each division has its own division controller, who reports to
both the division manager and the corporate controller. In Figure 1–2, the operating divi-
sions have their own controllers. The division controller provides the corporate controller
with periodic reports on the division’s operations. The division controller oversees the
division’s budgets, payroll, inventory, and product costing system (which reports the cost
of the division’s products and services). While most firms have division-level controllers,
some firms centralize these functions to reduce staff so that all the division-level controller
functions are performed centrally out of corporate headquarters.
The controllership function at the corporate, division, and plant levels involves assist-
ing decision making and control. The controller must balance providing information to
other managers for decision making against providing monitoring information to top exec-
utives for use in controlling the behavior of lower-level managers.
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 would have signified nothing if Lord Tweeddale had not been fixed in the
same notion. So my principles and zeal for the church, and I know not what
besides, were raised to make my advice signify somewhat.”—Hist. vol. i. p.
413.

At first the treacherous boon was not perceived by many excellent

“outted” ministers in its naked deformity. They thought that it opened
for them a door to preach the gospel, of which they were anxious to
avail themselves, and imagined that by explicitly avowing their
sentiments when they accepted their appointments, they would
exonerate their consciences and satisfy their brethren. Accordingly,
when these ten were brought before the council, and received their
allotments, accompanied with injunctions, Mr George Hutchison, late
one of the ministers of Edinburgh, transported to Irvine, thus spoke:
—“My lords, I am desired in the name of my brethren present to
acknowledge in all humility and thankfulness, his majesty’s royal
favour, in granting us liberty and the public exercise of our ministry,
after so long a restraint, and to return thanks to your lordships for
having been pleased to make us, the unworthiest of many of our
brethren, so early partakers of the same. We having received our
ministry from Jesus Christ, with full prescriptions from him for
regulating us therein, must, in the discharge thereof, be accountable
to him; and as there can be nothing more desirable or refreshing to
us upon earth, than to have free liberty of the exercise of our
ministry, under the protection of lawful authority—the excellent
ordinance of God, and to us most dear and precious—so we
purpose and resolve to behave ourselves, in the discharge of the
ministry, with that wisdom and prudence which becomes faithful
ministers of Jesus Christ, and to demean ourselves towards lawful
authority—notwithstanding of our own judgment in church affairs—as
well becomes loyal subjects, and that from a principle of conscience.
And now, my lords, our prayer to God is, that the Lord may bless his
majesty in his person and government, and your lordships in your
public administrations; and especially, in pursuance of his majesty’s
mind, testified in his letter, wherein his singular moderation eminently
appears, that others of our brethren may in due time be made
sharers of the liberty, that, through his majesty’s favour, we now
enjoy.”
 Mr Hutchison’s address neither pleased the council nor satisfied
his brethren. The latter thought it did not assert with sufficient
plainness the sole kingship of Christ in his church, nor bear an
honest enough testimony against the usurpation of Charles and his
council. The rest, who were selected for a similar favour, had
therefore resolved to be more downright, but they were never
allowed an opportunity. The council, who wished to hear no more
upon the subject, sent their appointments to them. The whole
number under the first indulgence amounted to forty-three. They
were willingly received by the people, and as they abstained from
controversial subjects and confined themselves to the pure doctrines
of the gospel, it was remarked that they were eminently
countenanced of the Lord in their labours.
As had, however, always been anticipated by the more unbending
part of the ministry, this partial relaxation to a few was accompanied
by harsher measures against the rest, especially those who,
choosing to obey God rather than man, could not in conscience
comply with the mandates of those rulers, and desist from declaring
the glad tidings of salvation as He, in his providence, gave them
opportunity. A fresh proclamation was issued, (August 3,)
commanding all heritors to delate to the next magistrates, any who,
within their bounds, should take upon them to preach and carry on
worship in any unwarrantable meetings, that they might be thrown
into prison—the magistrates of burghs were required to detain them
till further orders—and the lieges were likewise informed, that the
laws would be rigidly put in execution against all withdrawers from
public worship in their respective congregations. These, however,
were only preparatory to severer parliamentary enactments, which
confirmed the worst suspicions of those who uniformly distrusted the
equivocal toleration of their rulers, and justified their refusal to come
to any compromise as a matter of sound policy, even had it not been
a point of conscience. In the interim, the prelates pursued their own
measures, to render abortive the provision intended for the
unindulged, but quiet, part of the brethren. They procured that the
act of parliament which allotted all vacant stipends, since 1664, to
the support of the universities, should be examined into; nor does it
appear that any one of the sufferers ever received a farthing from
that fund. Mr John Park, one of the ten, late minister of Stranraer,
was reponed to his own parish, but the bishop of Galloway, three
days after the council’s nomination, admitted one Nasmith to the
charge; and notwithstanding, or perhaps rather because the people
were unanimous in favour of their late pastor, the council rather
chose to submit to the insult done their authority, than disoblige the
prelate, and confirmed the intruder in his office.
A project of an union between the two kingdoms was the
ostensible reason for assembling the Scottish parliament after six
years’ interval. The project came to nothing; but, in the meanwhile, it
subserved the ambition of Lauderdale, who was appointed
Commissioner. The elections went entirely in favour of his party, and
he was received in Scotland with little less pomp than if he had been
the sovereign, for his opponents were eager to deprecate his anger;
and the Presbyterians, the dupes of their own wishes, fondly
believed that he was still in heart with them, though he had been
forced by circumstances to act otherwise, in which they were the
more confirmed by an incident that occurred two days before the
parliament sat down, which yet was only a political fracas. Burnet,
archbishop of Glasgow, who was one of the stoutest assertors of the
king’s absolute supremacy, when it overturned Presbyterianism and
settled Episcopacy, was by no means so clear about his majesty’s
right to set aside the laws when he trenched upon the functions of
the bishops, and granted relief to the persecuted ministers. He,
therefore, in the Episcopal synod of Glasgow, caused, or allowed, a
remonstrance to be drawn up against the indulgence, representing it
as an illegal stretch of power, and likely to be destructive to the
church. Unfortunately for the right reverend father, he stood opposed
both to Lauderdale and Sharpe, and the affair being brought before
the council, his lordship was ordered to produce the paper, which
was forwarded to the king; and James Ramsay, dean of Glasgow,
and Arthur Ross, parson, who had drawn it up, were severely
reprimanded—the paper suppressed—and “all his majesty’s lieges,
of what function or quality soever, discharged from countenancing or
owning the same.” Lauderdale did not, however, long allow the
Presbyterians to remain in doubt as to his real sentiments. In his
speech to parliament, which met on the 19th, he assured them of the
king’s unalterable determination to support Episcopacy—avowed his
own attachment to it—and inveighed against conventicles, whose
entire suppression he urged, as his majesty having granted an
indulgence, would never now consent to tolerate them.
The parliament, like their predecessors, showed every inclination
to comply with whatever was required; and in their first act asserted
and declared, that his majesty had the supreme authority and
supremacy over all persons and in all causes ecclesiastical within
the kingdom, and that the ordering and disposal of the external
government and policy of the church did properly belong to the king
and his successors, as an inherent right of the crown, who might
emit such orders concerning the external government of the church
—the persons employed in it—their meetings, and the subjects to be
discussed there, as in their royal wisdom they should think fit, which,
when entered in the books of council and duly published, were to be
obeyed by all his majesty’s subjects, any law, act, or custom, to the
contrary notwithstanding. Even the bishops themselves were not
greatly delighted with this act, and such of the nobility as retained
any lingering respect for the religious liberties of their country, were
only induced to support it by the representations of Lauderdale, that
it was necessary to have some check upon the bishops, whose
insolence was intolerable; but the consistent Presbyterians saw in it
nothing but the assumption of an antichristian power, which no
magistrate on earth had any right to possess, and it afforded to them
another and a stronger objection than they previously had, to
accepting any indulgence from the king. The conduct of the council
in embodying the militia, and thus, under another name, establishing
a standing army in Scotland, was next approved of by an ex post
facto act, empowering his majesty to do what had been already
done, and declaring this also an inherent right of the crown. Then
followed an act for the security of the persons of the orthodox
ministers.
It seems three women, or men in womens’ clothes, most probably
the former, had, during the summer, on one night about nine or ten
o’clock, come into the house of John Row, curate of Balmaclellan, in
Galloway—who afterwards turned a papist—and taking him out of
his “naked bed,” had inflicted upon his carcass a very irreverent
flagellation, after which, it is said, they opened his trunk and took
away what they had a mind; for this, the heritors of the parish were
fined £1200 Scots. Mr Lyon, curate at Orr, was searched for, but
missed; and, it was reported, his house was spoiled; for which his
parishioners were assessed in the sum of six hundred merks. These
sums having been levied by order of the privy council, this act was
procured to legitimate all similar exactions in future, and, like almost
every other enactment of this period, added a new link to the chain
of despotism. The forfeitures inflicted by the Court of Justiciary were,
in like manner, legalized by an act of this congregation of
sycophants, whose session ended on the 23d of December.
Towards the close of the year, the first field-meeting was held in
Fife. Mr John Blackadder having gone to visit his two friends, Sir
James Stewart and Sir John Chiesly, who were then imprisoned in
Dundee, Lady Balcanquhal invited him to preach in her house—the
only species of conventicle yet known in that district; but he
fearlessly caused public advertisement to be made, that all that were
athirst might come without money and without price. “Let all the
world,” said he, “see that you do not huddle up so profitable and
honest a work, or keep it to yourselves; for my part, I am not
ashamed to avow, in the face of danger or death, I came not to call
the righteous, but sinners to repentance.” A multitude in
consequence assembled, too numerous for the house to contain,
and they betook themselves to the fields. Many were much affected;
and some, who were present, when asked, what they thought of the
work? answered with tears, that they had never seen such a day,
and were eager to know when such an opportunity might occur
again.
[1670.] Under whatever figure of speech it might be disguised, it
was now no longer a matter of doubt what was the dispute between
the Presbyterians and the Episcopalians. It was not a mere form of
church government—it was not a question about obedience to lawful
rulers. It was a contest between light and darkness—it was, whether
the gospel of the grace of God was to be freely preached to the poor
inhabitants of Scotland, or was it not? Historians, or men styling
themselves historians, in overlooking this circumstance, either do not
understand or wilfully avert their eyes from the fundamental cause of
the persecution, from this date till Bothwell Bridge, when it again
became mingled with political matters. Had there been any doubt
upon the subject, the proceedings of the privy council and of
parliament this year, would have sufficiently cleared it. Mr Andrew
Boyd, minister of Carmunnock, was, in the month of January,
committed to close confinement in Stirling Castle, for having
preached to, and met, for the purpose of worshipping God, with his
former parishioners. Nor would his defence be listened to, although
he pled the necessity of preaching the gospel when ignorance and
profanity so much abounded, and so many souls were perishing for
lack of knowledge. The ministers of Newbattle, Strathaven, and
Symington, were similarly treated, although they appear only to have
followed the apostolic practice, and “ceased not in every house to
teach and preach Jesus Christ.” Some fines were at the same time
levied upon those who attended. One lady (Helderston) was fined
four hundred merks for having had a conventicle in her house in
Edinburgh—a merchant, for having had his child baptized, was
mulcted in two hundred—and four citizens, for being present, paid
each one hundred pounds—although, as a venerable minister
observed before the council, there was as yet no law of Scotland
forbidding the worship of God, which was the only crime laid to their
charge.
While the “outted” ministers were forbid to exercise their ministry in
any shape, those who were indulged soon began to experience that
their liberty was by no means perfect freedom. The first link that was
added to their chain, was a prohibition from explaining the Scriptures
to their people in the manner they thought best fitted to convey
instruction. It is evident that, in stated congregations, an exposition
of connected passages of Scripture, or what is generally known in
Scotland as “lecturing,”[68] is eminently calculated to improve and
edify the church; and this had been an old method employed by the
most distinguished and successful of the Presbyterian ministers. The
indulged continued the practice; but for this the uneducated and
worthless crew who had been thrust into their charges were totally
unfit, and their pulpit exhibitions only encountered the scorn of their
hearers—sometimes perhaps too rudely expressed.
Complaints were therefore made to the privy council, and their
superior ability and mode of teaching were imputed as crimes to the
indulged, whose favour with the people, by the same reasoning, was
considered the cause of their hatred to the curates. They were in
consequence forbid to lecture, and a commission was granted to the
Duke of Hamilton, the Earls of Linlithgow, Dumfries, Kincardine, and
Dundonald, the Lord Clerk Register, and Lieutenant-General
Drummond, or any four of them, to “put to due and rigorous
execution the acts of parliament and councils” respecting
“pretended” religious meetings, the security of the orthodox clergy,
and to examine into the conduct of the indulged ministers. The
charges of outrage brought forward by the legal incumbents against
their parishioners, were in some cases villanously false, and in
others ridiculously exaggerated. One Jeffray, curate of Maybole,
accused the Whigs of having attempted to shoot him, and produced
a volume contused by a ball, which he said had saved his life, having
been in his bosom when he was fired at; but, upon examination, it
was found that the clothes he wore at the time were untouched, the
blockhead having forgot to perforate his garments when he wounded
his book. This precious evangelist was, in consequence, dismissed;
but when there happened to be any ground for complaint, the case
was remitted to Edinburgh, and the punishment was extravagant.
Some idle boys had thrown a bit of rotten wood at the curate of
Kilmacomb while he was holding forth; and when he left the pulpit in
terror, they followed the fugitive, huzzaing and shouting, till he
reached the manse. For this boyish insolence, which probably
merited a whipping, four of the offenders were sentenced to be
transported to the plantations! and the heritors of the parish were
fined one hundred pounds sterling, which Mr John Irvine, the said
curate, received as a solatium. The parson of Glasford’s house was
robbed by common thieves, one of whom being afterwards executed
for another crime, confessed the fact. The Whigs, however, were
accused, and the parish paid one thousand pounds Scots for having
maltreated a man they had only despised.
 68. There is not a more delightful example of this mode of teaching than
Leighton’s exposition of the First Epistle of Peter.

These instances may serve to show the spirit of the times which all
our historians agree in representing as mild and moderate, and
certainly the managers were so, in comparison of those who
succeeded them. The indulged ministers were examined by the
commissioners as to whether they had desisted from lecturing; but
the equivocal shifts to which they had recourse, exposed them to the
animadversions of their stricter brethren, and did not exalt their
characters with the prelatical party. Some read a whole chapter,
naming one verse only as a text. Others read two chapters, and
offered a few observations; and in this part of the service they, in
general, never exceeded the length of half an hour, which seems to
have been a redeeming qualification, for the visiting committee
neither silenced nor removed any of them. They contrived also to
celebrate the 29th of May in a manner equally illusive, by contriving
to have a baptism, a diet of catechising, or their week-day sermon,
upon that anniversary day; but the jealousy of the people was kept
alive by the exiled ministers. Mr John Brown, late minister of
Wamphray, and Mr John Livingston, both wrote, condemning such
duplicity in practice, and exposing its danger, though at the same
time they expressed themselves affectionately with respect to their
brethren, the men whose conduct they condemned. Nor did the
visiting committee fulfil the expectation of their employers. Gilbert
Burnet, afterwards bishop of Sarum, was at this period professor of
divinity in the University of Glasgow; and as he was respectable both
for his talents and conduct—moderate in his principles regarding
church government, and a friend to toleration, the commission were
considerably influenced by his advice, which, from his first outset in
life, was uniformly opposed to all persecution; and also by that of the
amiable Leighton, who with much reluctance had been prevailed
upon to hold the archbishopric of Glasgow, in commendam, upon the
resignation of Alexander Burnet, whose conduct in the remonstrance
being offensive to his majesty, had rendered it requisite for him to
demit. They therefore, though they imprisoned and harassed a
number of the Presbyterians for not attending the church, and for
attending conventicles, yet, because they did not execute in their full
rigour the instructions and proclamations of the privy council, were
reckoned unfriendly to the cause of Episcopacy.
A great desire to hear continued to increase and to prevail during
this period; and these servants of Christ—who could not consent that
the word of God should be bound, followed by vast multitudes, when
they could not find accommodation within any common house—
imitating the example of their Lord, chose the field for their cathedral,
and, with the heavens for their canopy, and the mountain side for
their benches, preached boldly the gospel of salvation. The most
remarkable assemblage of this kind which had yet occurred, was
that held, 18th June, on the Hill of Beath, near Dunfermline, of which
one of the presiding ministers has left an account, and which I insert
in his own language. They could not now, however, be held with the
same security as formerly, for the council had offered a reward to the
soldiery for dispersing these meetings and apprehending the
minister, or such as could give information concerning him, with the
most considerable heritors and tenants, who were all rendered liable
to imprisonment and fine. It was therefore necessary to appoint
watches and take precautions for their personal security; and as
people of that rank generally went armed, they did not lay them
aside when their attendance on gospel ordinances was threatened to
be interrupted by violence. Upon this occasion, Burnet says, as a
matter of course, “many of these came in their ordinary arms, that
gave a handle to call them rendezvouses of rebellion,” vol. i. p. 430.
Though the spot was not distinctly marked out, it was, during the
preceding week, pretty generally understood, and a vast
congregation gathered from almost every quarter of the country.
“On Saturday afternoon,” says the narrator, “people had begun to
assemble. Many lay on the hill all night; some stayed about a
constable’s house, near the middle of the hill; several others were
lodged near about, among whom was Barscob and nine or ten
Galloway men. The minister, Mr Blackadder, came privately from
Edinburgh on the Saturday night, with a single gentleman in his
company. At Inverkeithing, he slept all night in his clothes, and got
up very early expecting word where the place of meeting was to be,
which the other minister (Mr John Dickson) was to advertise him of.
However, he got no information, and so set forward in uncertainty.
Near the hill, he met one sent by the minister to conduct him to a
house hard by, where he resolved, with the advice of the people, to
go up the hill for the more security and the better seeing about them.
When they came, they found the people gathered and gathering, and
lighting at the constable’s house, who seemed to make them
welcome. While they were in the house, a gentleman was espied
coming to the constable’s door and talking friendly with him, who
went away down the hill. This gave occasion of new suspicion and to
be more on their guard. However, they resolved to proceed to the
work, and commit the event to the Lord.
“When a fit place for the meeting and setting up of the tent was
provided—which the constable concurred in—Mr Dickson lectured
and preached the forenoon of the day. Mr Blackadder lay at the
outside within hearing, having care to order matters and see how the
watch was kept. In time of lecture he perceived fellows driving the
people’s horses down the brae, which he supposed was a design to
carry them away. He rising quietly from his place, asked them what
they meant? They answered, it was to drive them to better grass.
However, he caused them bring them all back again within sight.
After Mr Dickson had lectured for a considerable space, he took to
his discourse, and preached on 1 Cor. xv. 25. ‘For he must reign till
he hath put all his enemies under his feet.’ In time of service, some
ill-affected country people dropped in among them, which being
observed by Mr Blackadder and those appointed to watch, he
resolved to suffer all to come and hear, but intended to hinder the
going away of any with as little noise as might be. Among others
came two youths, the curate’s sons, and about fourteen or fifteen
fellows at their back, who looked sturdily; but after they heard, they
looked more soberly. The two young men were heard to say they
would go near the tent and walk about to the backside of it, which
some who were appointed to watch seeing, followed quickly, so they
halted on their way. The man that came to the constable’s house in
the morning was seen at the meeting, and kept a special eye upon;
essaying to go away to his horse at the constable’s, two able men of
the watch went after, and asked why he went away? He answered,
he was but going to take a drink. They told him they would go with
him, and desired him to haste and not hinder them from the rest of
the preaching; so he came back; but he was intending to go and
inform the lieutenant of the militia who was at the foot of the hill and
gathering his men. However, the sermon closed without disturbance
about eleven hours in the foreday, the work having begun about
eight.
“Mr Blackadder was to preach in the afternoon. He retired to be
private for a little meditation. Hearing a noise, he observed some
bringing back the curate’s two sons with some violence, which he
seeing, rebuked them who were leading them, and bade let them
come back freely without hurt; and he engaged for them they would
not go away; so they staid quietly, and within a quarter of an hour he
returned and entered into the tent. After some preface, which was
countenanced with much influence, not only on professed friends,
but on those also who came with ill intentions, so that they stood as
men astonished with great seeming gravity and attention, particularly
the two young men. It was indeed a composing and gaining
discourse, holding forth the great design of the gospel to invite and
make welcome all sorts of sinners without exception. After prayer, he
read for text, 1 Cor. ix. 16. ‘For though I preach the gospel, I have
nothing to glory of, for necessity is laid upon me; yea, wo is unto me
if I preach not the gospel.’
“After he had begun, a gentleman on horseback came to the
meeting and some few with him. He was the lieutenant of the militia
on that part of the country, who lighting, gave his horse to hold, and
came in among the people on the ministers left hand, stood there a
space, and heard peaceably. Then essaying to get to his horse,
some of the watch did greatly desire he would stay till the preaching
was ended, telling him his abrupt departure would offend and alarm
the people. But he refusing to stay, began to threaten drawing his
staff. They fearing he was going to bring a party to trouble them, did
grip and hold him by force as he was putting his foot in the stirrup.
Upon this Barscob and another young man, who were on the
opposite side, seeing him drawing his staff, which they thought to be
a sword, presently ran each with a bent pistol, crying out—‘Rogue,
are you drawing?’ Though they raised a little commotion on that side,
yet the bulk of the people were very composed. The minister seeing
Barscob and the other so hastening to be at him, fearing they should
have killed him, did immediately break off to step aside for
composing the business, and desired the people to sit still till he
returned, for he was going to prevent mischief. Some not willing he
should venture himself, laboured to hinder him. He thrust himself
from them, and pressing forward, cried—‘I charge and obtest you not
to meddle with him or do him any hurt,’ which had such influence on
them, that they professed afterwards they had no more power to
meddle with him. The lieutenant seeing it was like to draw to good
earnest, was exceeding afraid and all the men he had; but hearing
the minister discharging the people to hurt him, he thrust near to be
at the minister who had cried—‘What is the matter, gentlemen?’
Whereon the lieutenant said, ‘I cannot get leave, sir, to stand on my
own ground for thir men.’ The minister said, ‘Let me see, sir, who will
offer to wrong you; they shall as soon wrong myself; for we came
here to offer violence to no man, but to preach the gospel of peace;
and, sir, if you be pleased to stay in peace, you shall be as welcome
as any here; but if you will not, you may go, we shall compel no
man.’ ‘But,’ said he, ‘they have taken my horse from me.’ Then the
minister called to restore his horse, seeing he would not stay
willingly. Then he was dismissed without harm at the minister’s
entreaty, who judged it most convenient that the gentlemen and
others to whom he should report it, might have more occasion of
conviction that both ministers and people who used to meet at such
meetings, were peaceable, not set on revenge, but only
endeavouring to keep up the free preaching of the gospel in purity
and power, in as harmless and inoffensive a way as was possible.
Some of the company, indeed, would have compelled and bound
him to stay if he had not been peaceable; but they were convinced
afterwards that it was better to let him go in peace. The whole time of
this alarm on that quarter, all the rest of the people sat still
composedly—which was observed more than ordinary in any
meeting either before or after—seeing such a stir. As in many other
things the mighty power and hand of the Lord was to be seen in that
day’s work, and the fruit that followed thereon.
 “When the lieutenant was gone, the rest that dropped in through
the day, with the curate’s two sons, staying still, not offering to follow.
After the composing that stir, which lasted about half an hour, the
minister returned to the tent, and followed out the rest of his work,
preaching about three quarters of an hour with singular
countenance, especially after composing the tumult. All the time
there were several horse riding hither and thither on the foot of the
hill, in view of the people, but none offered to come near; for a terror
had seized on them, as was heard afterwards and confessed by
some of themselves. The minister, apprehending the people might
be alarmed with fear, that they could not hear with composure—
though none did appear—did for their cause close sooner than he
intended, though the people professed afterwards, and said they
would rather he had continued longer, for they found none either
wearied or afraid.
“The minister that preached in the afternoon, with about sixteen or
twenty of the ablest men, went to the constable’s house, where they
had prepared dinner, and would have him and his company come in
to dine; but he calling for a little drink and bread on horseback, the
rest also taking something without doors, and missing the other
minister, feared lest some of the enemy in dismissing had
apprehended him. So, leaving the rest at the house, he rode up the
hill again, with some others who were on horseback, to seek him; for
he said he would not go without the other minister, but resolved to
cause rescue him if he had been taken; and coming to the place
where the meeting had been, some of the people told him the
minister had taken horse with another gentleman a little before the
close; upon which he returned again to the company at the house,
who desired him to ride away, they being on foot. He told them he
would stay, and also desired them to stay, till they should see all the
people get safe from the hill; and when all were peaceably
dismissed, he with another on horseback, rode to the Queensferry.
The rest being able men and on foot, were to follow. When he came
thither, none of the boats would go over at that time, the country
being ill set and in such a stir. It was not thought fit he should stay on
that side of the water, therefore he rode up three or four miles,
expecting to get boat at Limekilns; but that being gone over with
others at the meeting before, he rode forward towards Kingcairn,
where they again essayed at Hoggin’s-neuk; but the boat being on
the other side, they were forced to ride on towards Stirling. He came
thither about nine at night; and after they had crossed the bridge,
and rode through some back lanes of the town, they came at the port
they should go out at, but it was shut, only a wicket open, through
which they led their horses, and so escaped the alarm which arose
in the town a little after they were gone. They rode that night about
four miles to Torwoodside, where they lighted at an honest man’s
house, took a little refreshment for man and horse, till break of day,
and then rode for Edinburgh. They went hard by the gate of the
place of Callander, where the Chancellor and other noblemen were
at the time, they not knowing till afterwards. They rode also by the
back of the town of Linlithgow, where many ill set people were. About
seven o’clock on Monday morning, he came to Edinburgh, where the
noise was come before; therefore he retired to another chamber,
and, after taking breakfast, he lay down and slept six hours’ space,
being much wearied, having not cast off his clothes and ridden forty-
eight miles from Sabbath about twelve o’clock. The gentlemen and
the rest whom he left on the hill, came over at the Ferry, and
returned to Edinburgh in safety that night.”
Reports of this meeting quickly spread to the remotest corner of
the land; and the evident tokens of the divine presence which had
accompanied the exercises of the day, stirred up a holy emulation in
the other ministers, who thanked God and took courage, and excited
and kept alive among the people an attention to the concerns of their
souls, which too often languishes in the days of ease and amid the
undisturbed enjoyment of gospel privileges, while to many the word
came in the demonstration of the spirit and with power; so that even
some who were unfriendly to these irregular proceedings, were
constrained to acknowledge that in their sermons, in houses and
fields, the “outted” ministers were remarkably countenanced of the
Lord and blessed with many seals of their ministry, in the conversion
of many, and edifying those who were brought in. It was followed in
about a fortnight by another not less numerous at Livingseat, in West
Calder, where Mr John Welsh presided; and, in the beginning of July,
a large conventicle was held at Torwood-head, for which a Mr
Charles Campbell, in Airth, was imprisoned and fined; but who was
the minister on this occasion, I have not learned. Grievous was the
rage of the prelates; but the invasion of the primate’s more
immediate territories behoved to be visited with signal vengeance, as
a horrid insult had been offered so near the place where he had his
seat. The two ministers were denounced and put to the horn
—“multitudes” were imprisoned, fined in large sums, and otherwise
harassed—James Dundas, the brother of the Laird of Dundas, was
sentenced to transportation, under pain of death if he returned—and
others, equally respectable, were brought to no little trouble,
although but few were actually sent to the plantations.
The case of “four Borrowstownness-men,” is too remarkable to be
passed over. Their names were, John Sloss, a residenter in the
town; David Mather, elder in Bridgeness; John Ranken, in Bonhard;
and James Duncan, in Grange. These having been apprehended,
were brought before the council, and refusing to give any
information, or turn informers against their brethren, were fined each
five hundred merks, and sent back to prison to remain during the
council’s pleasure. They were afterwards brought before the council,
and, along with other six, condemned upon an ex post facto statute
to be sent as slaves to the plantations; and when one of them only
entreated to be allowed to take farewell of his wife and small family,
Lauderdale furiously replied—“You shall never see your home more,”
adding, with a malignant sneer, “this will be a testimony for the
cause.”
In this, however, he proved a false prophet. Mr Blackadder tells us,
the four got their liberty, which fell out by a singular cast of
providence. The guard that conducted them from the Canongate jail
brought them to the outer council-house, and leaving them there with
the guards who waited on their neighbours from the high town
tolbooth; and thinking themselves exonered, they went their way,
expecting that the guard that waited on the prisoners from the town
tolbooth would notice them. After they had gotten their sentence,
command was given to carry the whole to their respective prisons;
upon which those who guarded the prisoners of the town carried
them to the tolbooth, the rest were left without a guard.
Notwithstanding, at the dismissing of the council, and the throng of
people, they went on, supposing their guard to be following. One of
them never knowing, went the whole length, and entered the prison
again. Other two went the length of the Cross, till a friend came and
asked, whither they were going? They said, “to their prison.” He said,
“Will you prison yourselves, seeing there is none waiting to take you
to it?” which they perceiving, made their escape. Other two went the
length of the Netherbow, then looking behind, and seeing none
guarding them, made their escape also. The other five, together with
him who went back inadvertently, were afterwards, through the
interest of the Chancellor’s secretary, and perhaps owing to the
ludicrous appearance the council cut by the escape of the four, also
granted their liberty.[69] A pious youth, who was at the Beath Hill and
Livingseat, was committed close prisoner, ordered to be put in irons,
and fed on bread and water during pleasure; and although great
interest was made for him, he obtained no release, till the iron had
gangrened his legs, which eventually, according to Kirkton, cost him
his life.
69. Blackadder’s Mem. MSS. quoted in his life.
Previous to the meeting of parliament, Lauderdale, wishing to
ingratiate himself with the prelatic party, urged on the persecution of
the non-conformist Presbyterians. They had in the beginning of the
year been banished the capital. Immediately upon his arrival, he
issued a proclamation forbidding any of them to come to Edinburgh
without a license, upon pain of death; but summonses were issued
to the most zealous who had been guilty of preaching, requiring
them to appear before the council. The latter came privately to town,
to ascertain the temper of their rulers and their own probable fate,
when finding that imprisonment or exile would be the consequence
of their attending, resolved to decline. Before separating, they drew
up an affecting letter to their brethren, bemoaning the desolations of
Zion and the rod of wickedness lying upon the lot of the righteous,
but chiefly lamenting the little kindliness and melting of heart among
professors—their little sympathy with the Lord’s dear servants and
people, now bearing the heat and burden of the day, made
wanderers and chased from mountain to hill, not having where to lay
their head—and the readiness of some rather to censure than
partake of affliction with those who were suffering for the sake of the
gospel. Beseeching them to stir up that great mean and duty—all
that seemed left to them—of serious prayer, supplication, and
wrestling with the Lord, both alone and together—an exercise which
Christ himself had so much recommended, “that we ought always to
pray, and not to faint;” so much practised by the saints, especially in
particular exigencies, as Acts xii. 5. “Prayer was made of the church
without ceasing;” and ever followed with a blessed success when
seriously gone about—“They called upon the Lord and he answered
them.” Psal. xcix. 6. Jas. v. 16-18; while it carried with it a sweet
reward in its own bosom, even “the peace of God, which passeth all
understanding, keeping and guiding both heart and mind through
Christ Jesus.” Phil. iv. 7.
This letter was attended with the best effects. Many of the godly
ministers throughout the land—men of prayer—were stirred up by it,
and set apart stated seasons for solemn fasting and supplication for
the church and country, which God answered to themselves by
terrible things in righteousness. He caused men to ride over their
heads; they went through fire and through water, but he brought
them out into a wealthy place. Their worldly circumstances were
straitened, but the gospel had free course and was glorified. Some
lived to see his gracious interposition in the glorious Revolution,
1688; numbers never did, but were favoured to go by a shorter road
from a scaffold to a throne; yet their posterity have reaped and are
reaping the benefit of their prayers.
 BOOK VIII.

JULY, A.D. 1670-1674.

Parliament—Act against conventicles—Bond—Leighton’s efforts to reform the

Episcopate—Council appoint a committee—Leighton attempts an
accommodation—Conference—Rigid treatment of indulged ministers—
Conventicles increase—Implacability of the Prelates—Lady Dysart—
Ascendancy of Lauderdale—Parliament—Finings—Indulgence—Dissensions
of the ministers—Sufferings of the indulged—Mr Forrester and Mr Burnet
abandon Prelacy—Their testimony—Proceedings at the meeting of estates—
Mr Blackadder’s tour in Fife—Ministers’ widows’ petition—Its consequences-
Sharpe’s troubles.

Parliament commenced a short session, July 28, ostensibly for the

purpose of forwarding an union between the two kingdoms; and their
first bill empowered the king to name commissioners for this
purpose, but the scheme, if ever seriously entertained, proved
abortive. Their other proceedings were of more deplorable efficacy.
Men of principle, who were accustomed to attend upon the
preaching of the gospel, or the worship of God in unauthorized
places, and who seldom or never refused to acknowledge their own
participation in such misdemeanours, yet, as they considered it a
crime to discover the minister or their fellow-worshippers, they
uniformly refused to turn informers; and this which, in any other
case, would have been extolled as an high and honourable feeling,
was in them to be treated as a felony. An act was therefore
introduced against “such who should refuse to depone against
delinquents,” ordaining that all of what degree, sex, or quality soever,
who should refuse to declare upon oath their knowledge of any
unlawful meetings, the several circumstances of the persons
present, and things done therein, to any having authority from his
majesty, or who should conceal or reset any who were or might be
declared rebels—should be punished by fining, imprisonment, or
transportation as slaves to the plantations. To ensure the safety of
the orthodox clergy, any attempt upon their houses or persons was
declared punishable by death and confiscation of goods; and a
reward of five hundred merks was offered to any person who should
discover and seize such “robbers or attempters;” or, if one should
inform, and another seize, the first was to have two, and the other
three hundred merks of the same.
The most atrocious measure, however, of this assembly, was their
“act against conventicles,” by which it was statute and commanded
that the “outted” ministers, who were not licensed by the council, and
no other persons not authorized nor tolerated by the bishop of the
diocese, should presume to preach, expound Scripture, or pray in
any meeting, except in their own houses, and to those of their own
family, “under pain of imprisonment till they should find security to
the amount of five thousand merks never again to trespass in a
similar manner, or to remove out of the kingdom and never to return
without his majesty’s license; every person present was to be fined—
an heritor, a fourth part of his yearly rent—a tenant, twenty-five
pounds Scots—a cottar, twelve pounds—and each servant, a fourth
part of his yearly fee; and if accompanied by wives or children, half
the sum for each. The master or mistress of the house to pay
double. Besides which, the magistrates of any burgh where a
conventicle was kept, were rendered liable to a fine at the pleasure
of the privy council, they having recourse upon the persons present,
who were thus subjected to be twice mulcted for the same crime;
and in addition, punished with imprisonment as long as the council
should see fit.”
Field-conventicles, denominated “rendezvouses of rebellion,” but
explained to be meetings for hearing the Scriptures expounded, or
for prayer, were punishable—the minister by death and confiscation
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