Woman C.P.A.

Volume 41 Issue 1 Article 4

1-1979

Short History Of Budgeting

Tonya K. Flesher

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Flesher, Dale L. and Flesher, Tonya K. (1979) "Short History Of Budgeting," Woman C.P.A.: Vol. 41 : Iss. 1 ,
Article 4.
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 provide funds for the estimated
expenditures. Thus, the English budget
served two functions: to curb the
spending of public officials and to
control the king’s power to tax. This
procedure was an accounting control
A Short History procedure over incomes and
expenditures. The budget was primarily
in the form of an accounting statement
Of Budgeting and was prepared by the officer in
charge of national accounts, the
Chancellor of the Exchequer. Thus,
here was an early connection between
accounting and budgeting.

by Dale L. Flesher and Tonya K. Flesher The budget speech presented by the
Chancellor of the Exchequer included
an accounting for the past expenditures
and an estimate of future expenditures
with a proposal for a tax levy. The
budget was then an outline of the ways
and means of providing the supply of
funds needed to meet expenditures and
was a positive concept. To many, this
Budgeting plays a prominent role in the early Romans, Babylonians, and concept of the budget has been
the practice of modern business Egyptians. Consequently, the English transformed into a negative one of
administration. Such has not always are usually given credit for the first real restricting expenditures. It is interesting
been the case. Despite a long evolution, budgets as they are known today. King to note that the British interpretation of
budgeting is essentially a twentieth Henry I, who reigned from 1100 to a governmental budget to this day is
century innovation. A brief study of 1135, is credited with the first use of the that of providing revenues. The budget
budgeting’s evolutionary period should modern budget. The modern budget of is not considered until after the
provide modern budget personnel with King Henry differed from the earlier estimates of expenditures have been
a more appreciative perspective of their control systems in that the common made. In the United States, the estimate
work. man had a voice in the financial matters. of expenditures is called a budget.
The word budget is derived from the Thus, King Henry advanced the ideas of
Latin word bulga, meaning leather bag budgeting and democracy. Today, The New World
or knapsack. Later the term was also every leading country in the world The first evidence of the use of a
applied to whatever was contained in utilizes the science of governmental budget in the United States is the
the bag. The development of the budgeting. History reveals that any time informal budgetary statement that was
modern meaning of the word goes back this right to participate in the financial submitted by Alexander Hamilton, the
to early medieval France and to the days affairs of a government is denied, first Secretary of State, on January 9,
of the troubadours. These strolling serious trouble results. The English 1790, to the House of Representatives,
players assigned to one of their revolution of 1688 was an example of as part of his document entitled A
members the task of handling funds of this as were the American Revolution Report on Public Credit. That report
the company which were kept in a and the French Revolution.1 Thus, included an estimate for the services of
leather bag (bougette). This custodian budgeting is virtually synonymous with the current year. The first formal United
became known as the budgeter. This democracy in that the early connotation States government budget was not to
simply meant that he supplied the funds of budget related to the manner in come until over a century later.
for the group. Thus, the early definition which funds were supplied and The various state governments
of budget was that of a supply of democracy is concerned with “taxation adopted budgets before the federal
something contained in a bag, or a with representation.” government. From 1911 to 1919, forty-
supply of funds. The early literature on budgeting is four states enacted budget laws.2 Many
Governmental Budgeting limited to the budgeting of public funds. cities and other municipalities had
Even though the term budget was not The original purpose was to curb the begun using budgets even earlier.
used until medieval times, the concept extravagance of monarchs. As early as Municipal budgeting was used
of budgeting can be traced to the 1760, the English Chancellor of the extensively during the late 1890’s as a
beginning of history. The Babylonians Exchequer presented the national result of public pressure in the larger
and Egyptians employed elaborate budget to Parliament at the beginning cities. By 1920, nearly all American
systems of control over grain supplies of each fiscal year. The budget was the cities had adopted a budget system.
and money. The Romans relied on Chancellor’s report on national These reforms were prompted as a
estimates of income and expenses to finances. The budget served to protect reaction to the political gangs, such as
assess a tax based on the ability to pay. the people from excessive taxation in Tweed in New York.
Forecasts are even mentioned in the that the estimate of expenditures in the The public pushed for a national
Bible. budget also had to include a budget during the period from 1890 to
English Beginnings recommendation as to methods of 1920, but Congress refused to act.
Little is known about the budgets of levying taxes that would be needed to President Taft was the most vigorous
12/The Woman CPA
advocate of a national budget, but his records. Next, these records had to be perimentation to date into a complete
one term in office was insufficient time summarized for management, which led budget program for industry. His book
to get a system adopted. It was not until to experimentation in the design of cost was the first attempt to cover the budget
1921 that the federal government finally systems. The development of cost program for industry. It was also the
adopted a formal budget system. Up to accounting theories ultimately led to the first attempt to cover the entire
that time the financial plan consisted of idea of standard costs, which was budgetary program.
a collection of individual departmental a major factor in the development of
requests. The 1921 act gave the business budgeting. Eventually, all Panacea for Depressions
President the primary responsibility for operations of the business, not only It was the Great Depression which led
submitting a complete budget to the production costs, were standardized. to the widespread adoption of
Congress and established the bureau of The preparation of budgets became budgeting. By then, it became evident to
the budget in the Treasury Department. more scientific. Thus, the early history firms of all sizes that budgeting was es­
Charles Dawes was the first director of of business budgeting is closely tied to sential for profitability. The writings
the budget. the evolution of cost accounting and about budgeting were at their peak dur­
The period just prior to the turn of the industrial engineering. ing the decade of the 1930’s.
twentieth century was also the period Businessmen heralded the budget as the
when emphasis was first placed on the Scientific-Management Influence panacea for all economic ills. As a
personal budget. Although Ernest The early period of development of result, budgets were misused. There
Engel, a Prussian, had presented his business budgeting can be traced back were arbitrary reductions of personnel
four laws of family expenditure as early to 1880 in the United States when a and ill-planned and unrealistic cost
as 1857, it was not until 1899 that the group of industrial engineers banded reductions. In this climate, budgeting
first attempt in this country was made at together to form the American Society became enshrouded in an aura of
household budgeting. In that year, of Mechanical Engineers. This group negativeness. The budget became a sym­
Ellen H. Richards published The Cost criticized traditional accounting and ad­ bol of oppressive action and resulted in
of Living. Her work led the bureau of vocated other ways of measuring bad experiences for many individuals.
home economics of the Department of business results. Members of this band Much of the distrust and suspicion of
Agriculture to adopt the family budget of advocates of scientific management budgets today may be traced to that
as a major object of study.3 included F. W. Taylor, Towne, Halsey, period and the manner in which budgets
and Metcalfe.4 At the same time, ac­ were first introduced to many
Business Budgeting countants such as J. Whitmore, H. R. Americans.
Planning is an important process in Hatfield, and others responded to this Industrial engineers continued to
the business world. This process could challenge. The first decade of this cen­ contribute to the development of
be seen in Biblical times when Joseph, tury was the most fruitful period for the business budgeting in the decade of the
the Prime Minister of Egypt, forecast development of management account­ 1930’s. Most notable was John H.
the seven lean years in his interpretation ing through the promotion of reciprocal Williams whose book The Flexible
of a dream. The progress of planning in relations between engineers and accoun­ Budget was written in 1934. This book
business has gone from dreaming to tants. was the first major publication to bring
guessing and from guessing to scientific The early and fundamental idea of the concept of flexible budgeting to the
forecasting. Although some large standard costs and business budgets was attention of the manager. Williams
businesses in the U.S. used budgets concurrently evolved by engineers dur­ separated cost accounting and
prior to World War I, these were only in ing the first decade of this century. budgeting into two separate subject
certain areas or departments. The Henry Hess, an engineer, devised the areas. He contended that budgets are
complete budget came later in the fundamental ideas of profit planning based on foresight, while cost account­
development. First, firms tried to limit supplemented with break-even analysis ing is based on hindsight. Thus, he said
the expenses which were felt to be in 1903. Another engineer, C. U. that a budget should be prepared so that
luxuries, such as advertising, research, Carpenter, in 1907, used Hess’concepts any businessman can understand it
and personnel. Thus, the first use of and originated the business budget idea without any knowledge of accounting.7
business budgeting was for purposes of (although he did not use the term The true pioneer nature of this book can
restricting expenditures — not budget). Carpenter originated the ideas be appreciated even more when it is
measuring effectiveness. of budgetary control and budget noted that in all of the publications of
After Frederick Taylor brought variance analysis. The appearance of the National Association of Cost Ac­
standardization to production costs these new viewpoints were closely countants (NACA), only one reference
through his work with time studies and related to the social and economic situa­ appears on flexible budgeting prior to
test runs in 1911, production costs could tion at that time which was marked by 1930 and only six references may be
be accurately computed and attempts chronic overproduction and the found prior to 1935. This is unusual
were made to control the production recessions of 1903 and 1907.5 because books are usually preceded by
process. Taylor’s work in setting The period after 1920 has been one of journal articles on the same topic.
standards through his scientific substantial and rapid growth in the use Another engineer, C. E. Knoeppel,
methods constituted an important of budgets. It was in 1922, when J. O. employed the concept of a flexible
phase goes back to the early McKinsey published his Budgetary budget in his book, Profit Engineering,
development of cost accounting. The Control,6 that industrial budgeting published in 1933. Knoeppel called his
efforts of industrial engineers to reduce received its biggest impetus. World War concept a “Profitgraph.” In its simpliest
costs made cost finding a matter of I and the resultant emphasis on efficien­ form, the Profitgraph was merely the
prime importance. Cost accountants cy provided adequate stimulus and graphic presentation of a flexible
were required to provide adequate cost McKinsey’s work summarized all ex­ budget.
January 1979/13
 During this same period, Walter 1950’s was the undertaking of Summary
Rautenstrauch published The behavioral studies in budgeting. Chris Though of rather recent acceptance,
Successful Control of Profits (1930). Argyris’ book, Impact of Budgets on the seeds of budgeting were planted
Rautenstrauch, also an engineer, is People, was the forerunner in this area. many centuries ago. The earliest
credited with the development of the The 1960’s and 1970’s have witnessed budgets represented revenue plans for
breakeven chart.2 3*578 further refinements in the budgetary governmental bodies. Budgets became
Wartime Priorities process. The most publicized of these commonplace among American
The next stage in the development of has been the concept of zero-base governmental units during the period
business budgeting began with the start budgeting. The first formal zero-based from about 1880 to 1921. Cities were
of World War II. The government spon­ budgeting system was that used by the first to implement budget systems,
sored defense programs began to shift U. S. Department of Agriculture in followed by states and then the federal
emphasis away from cost control and to preparing its 1964 budget. Its use in that government.
focus attention, instead, on the necessity department was temporary. Texas In­ The first two decades of the twentieth
of getting a job done. Production struments, Inc. was the next to utilize century marked the germination period
programs and delivery schedules zero-base budgeting in 1969 and 1970. of business budgeting. The seed was
became the keys factors in business That firm is given the credit for develop­ there and it was nurtured by industrial
planning. As material shortages in­ ing zero-base budgeting in the form that engineering and cost accounting.
creased, firms were forced into es­ is known today.9 Business budgeting finally bloomed
tablishing some kind of an overall plan during the 1930’s. However, the concept
in order to meet production quotas. It had changed somewhat from that of
was this period which brought about the earlier decades. Whereas the first
emergency of the production planning budgets were conceived as a positive
and scheduling activity as a major part concept where funds were supplied to
of budgetary control. As the war cover expenditures, the budgets of the
progressed and there was lessening of 1930’s were seen in a negative manner
demand, interest again focused on where expenditures were eliminated.
production costs. The U.S. government, World War II contributed to the
who was the major customer, began to development of budgeting in that
indicate a growing interest in com­ material shortages and delivery
petitive bids. The ability to produce no schedules became as important as cost
longer was the prime requirement for control. Recent years have witnessed
obtaining a contract. contributions by behavioral scientists to
Additional evidence of the changing the science of budgeting. Statisticians
times was the movement for installation and economists have also played a role
of standard cost techniques in govern­ through research in the area of business
ment operated plants. Since there were cycles.
TONKA K. FLESHER, CPA, MBA, is
salary and wage differentials in different Instructor of Accounting at the University
The study of budgeting history is an
parts of the country, the government of Mississippi where she is a Ph.D. candi­ interdisciplinary study. Accountants,
needed to find some common unit of date. She has previously been published in engineers, behavioral scientists,
measure for comparing the jobs being The Woman CPA as well as other account­ statisticians, economists, and politicians
done by competing facilities. A standard ing journals. She is a member of A WSCPA, have all played major roles in the
cost system proved to be the common and serves on the Editorial Board of this development of budgeting. A budget is a
denominator which leveled out the journal. blend of many ideas. Perhaps future
variations. developments in budgeting will be deriv­
ed from still other disciplines. ■
The Competitive Edge
Despite the increased emphasis on
cost control, it was not until the end of NOTES
the Korean War that most firms began 1Andrew S. Mihalik, “Ye Olde Budget,” Jour­
nal of Accountancy (July, 1936), p. 54.
to adopt a realistic appraisal of budget 2Edwin L. Theiss, “The Beginnings of Business
techniques. With the tapering off of Budgeting,” Accounting Review (March, 1937), p.
post-war consumer demand, the 46.
necessity for reestablishing a firm com­ 3Mihalik, Op. Cit., p. 52.
petitive position became the major ob­ 4Atsuo Tsuji, “Shades of the Past— Budgeting
in Early 1900’s,” Managerial Planning
jective for most businesses. Also, a (March/April, 1975), pp. 23-29.
number of important by-products 5 Ibid.
began to emerge from budget planning 6Mames O. McKinsey, Budgetary Control (New
— the advantages of advance planning, York; Ronald Press, Inc., 1922).
7John H. Williams, The Flexible Budget (New
the expansion of the budget idea into a York: McGraw-Hill Book Company, 1934).
master plan for coordinating all ac­ 8 Raymond Villers, “The Origin of the
tivities, and as a potential management DALE L. FLESHER, CPA, CMA, Ph.D., is
Breakeven Chart,” Journal of Business (1955),
tool. In the 1950’s, there was more pp. 296-297.
Associate Professor of Accountancy at the 9James Pattillo, Zero-Base Budgeting: A Plan­
emphasis upon the extension and refine­ University of Mississippi. He has authored ning, Resource Allocation and Control Tool (New
ment of budget plans. Probably the ma­ two books, and many articles in professional York; National Association of Accountants,
jor contribution to budgeting in the journals. 1977), pp. 1-2.
14/ The Woman CPA