Jerome Lee (J. Lee) Nicholson (1863 – November 2, 1924) was an American accountant, industrial consultant, author and educatorChatfield (2014, page 436) at the New York University and Columbia University,Taylor (1979, page 7) known as pioneer in cost accounting. He is considered in the United States to be the "father of cost accounting."The Congress (1930). International Congress on Accounting, 1929: September 9–14, 1929 ... New York City. [Proceedings], page 1235.Hein (1959, page 106)
Nicholson most important contributions to cost accounting consisted of "emphasizing cost centres and the measuring of profits for individual departments based on machine hour rates." Also he helped establishing the National Association of Cost Accountants (NACA) in 1920, which resulted into the Institute of Management Accountants.Richard Mattessich (2007) Two Hundred Years of Accounting Research. p. 176
Biography Born in Trenton, New Jersey, Nicholson grew up in Pittsburgh, Pennsylvania. After attending common school and business college, he started in industry. In his spare time he studied accountancy, and eventually in 1901 he obtained his Certified Public Accountant license for the State of New York.Hein (1959, p. 107)
Nicholson had started his career at the Keystone Bridge Company, where he worked his way up from office boy to assistant at the engineering department. In drawing up plans for the company foreman and superintendent, he started to develop his interest in cost accounting. At the age of 21, in 1884, he moved to the Pennsylvania Railroad Company where he had obtained an accounting position. Around 1900 Nicholson started his own accountancy and consultancy firm J. Lee Nicholson and Company, specialized in cost systems for manufacturing organizations.
During World War I he served at the U. S. Ordnance Department as supervising cost accountant in 1917–18. He was promoted to the rank of Major,Nicholson (1913, page i) and kept using his rank in public life, signed his work with Major J. Lee Nicholson, and is remembered by that name.National Association of Accountants (1921) Proceedings of the International Cost Conference. p. 45.The Accounting review. Vol. 34. (1959), page 106. Previous to this position at the Ordnance Department, he was chief of the Division of Cost Accounting of the Department of Commerce. The filling of these positions gave him ample opportunity to become familiar with the war contract situation in its accounting aspects. In the summer of 1917 he was chairman of a conference of delegates from the War, Navy, and Commerce Departments, the Federal Trade Commission, and the Council of National Defense. This conference, in a pamphlet issued July 81, 1917, made certain recommendations regarding government contracts, and these recommendations are presented verbatim in Nicholson and Rohrbach's Cost Accounting (1919).
Nicholson has been active in accountancy societies since the early 1900s. He joined the New York State Society of CPAs in 1902, where he became its first vice-president, and served as its president. In 1906 he also joined the American Association of Public Accountants. In 1920 Nicholson was founding presidentMichigan Manufacturer & Financial Record, Volume 31. (1923). page 10 of the National Association of Cost Accountants (NACA) founded in Buffalo, New York, the forerunner of the Institute of Management AccountantsVangermeersch and Jordan (2014, pages 334-35)
Nicholson authored several books, including "Nicholson on Factory Organization and Costs" published in 1909, "Cost Accounting Theory and Practice" in 1913, and "Cost Accounting" in 1920 and several papers. All three books were published in multiple editions.
Due to his ill-health he retired and moved to California in 1922, where two years later he died suddenly November 2, 1924 in San Francisco.McLeod, S. C., "Major J. Lee Nicholson Dies Suddenly in San Francisco", N.A.C.A. Bulletin, November 15, 1924.
Work Early 20th century, when Nicholson started published his first work, the development towards modern cost accounting was well underway for two decades. Chatfield (2014) summarized that "After hundreds of years of painfully slow progress, cost accounting took off during the 1880s. Between 1885 and 1920, the essentials of modern cost technique were formulated and to some extent standardized in practice. Workable overhead allocation methods were devised, procedures were developed for integrating cost and financial accounts, and standard costing became routinized."
Chandra and Paperman (1976) specified, that "serious studies in cost accounting started only in the 1890s with the writings of Metcalfe, Garcke and Fells, Norton, Lewis, and later with Church, Nicholson and Clark. They were truly the pioneers who introduced new cost concepts like fixed and variable costs, standard cost, cost centers, relevant costs, etc. in the literature. The development of cost accounting in this period was undoubtedly slow. In addition, cost accounting tried to adapt itself within the framework of financial accounting. Part of the delay in the establishment of cost accounting concepts may be due to the tendency of cost accountants to keep the methods they had developed within their own firms secret."The economist John Maurice Clark is known in the field of accountancy due to his famous Studies in the economics of overhead. (1909) Source: Mattessich (2007, page 177) Nicholson and Rohrbach (1919) specified that most work on cost accounting was written in the last decade, stating that "more than 90% of this literature has been published in the last decade, and fully 75% in the last five years."Nicholson and Rohrbach [1919, page 1]; cited in: Boyns, Trevor, and John Richard Edwards. "British Cost and Management Accounting Theory and Practice, c. 1850—c. 1950; Resolved and Unresolved Issues ." Business and Economic History (1997): pages 452-462.
More specifics about Nicholson's role Chatfield (2014) noticed, that "Nicholson was less an innovator than a synthesizer. His main contribution was to organize, improve, and propagate this new knowledge as it spread from a tiny minority of pioneering firms to the vast majority of manufacturers who still had no formal cost accounting systems at the beginning of the twentieth century."
Nicholson in Factory Organization and Costs, 1909 Purpose
In 1909 Nicholson published his first book, entitled "Nicholson on Factory Organization and Costs". In the preview he explained that this work was primarily intended as a handbook for manufacturers, who are interested in "modern methods of organization and systems"; for accountants and cost specialists as a book of reference; and also as a textbook on cost accounting for the student.Nicholson (1909, page iii)
It was also Nicholson intention to outline and explain all the best known methods of Factory Organization, that relate to Cost Finding in such a manner as to enable the manufacturer to compare these methods with those in use in his own plant, in order that he may see more clearly the defects in his organization and how to remedy them. Nicholson hoped that the Public Accountant, Systematizer, and Cost Clerk would find this work to be of value as a reference in planning, devising, or changing a factory system.
Content The work contains forty-eight chapters. Among other important topics "Organization and Cost Finding" forms the subject of one chapter. In this chapter the author summarizes the most important arguments for and against cost systems; he also shows the effect of cost system on organization, independent of cost finding, pointing out clearly the value of system to management. The second important topic dealt with is " Wage Systems." Under this head the author points out the general relation of wage systems to costs, treating of the pay-rate-system, piece work and the differential rate plan, as well as profit-sharing and stock-distribution.
The author then discusses the "Analysis of Cost Accounting", pointing out the fallacy of including selling and administrative expenses in factory costs; also criticisms of incorrect principles in distributing overhead charges. He then deals with the distribution of indirect expenses and explains the old machine rate, new machine rate, fixed machine rate, new pay rate, etc.
The fifth and sixth chapters constitute a general introduction to the subject of forms and systems and discuss such topics as principles used in forms and systems, estimated cost systems, actual cost systems, the designs and explanations relating to the conditions under which forms should be used.
Chapters seven to forty-two contain a large variety of forms (over 200). While undoubtedly a number of these forms or similar ones are to be found in ordinary treatises, nevertheless a good many, if not the majority of them, are original and have evidently been taken from actual experience. The author elucidates and fully explains the use of all the forms given and the advantages that can be derived from them. The forms are in large clear type and well arranged. And finally, the last chapters treat of mechanical office appliances.
Analyses of cost accounting In the third chapter Nicholson described that in his days there was still a significant lack of knowledge on the subject of factory costs. Although the importance and desirability of accurate methods of ascertaining the cost of production is generally conceded, and while much attention has been devoted to this subject, and large sums of money expended annually in perfecting cost keeping records, there is a general lack of knowledge in many instances of the principles involved; and the problem now in hand is to present an analysis of the elements that go to make cost, and to indicate the lines along which methods must be devised to gather and classify the facts that are used in its actual determination. The accuracy and effectiveness with which this is done rests on, (1) the principles involved, and (2) the methods used.Nicholson (1909, pages 38-42)
Nicholson explained, that the elements that comprise the cost in all manufacturing enterprises are made up of three principal divisions:
Material : Direct material is that element of material that enters into the product itself and can be charged accurately to the article. Indirect material consists of such material as factory supplies used in the processes, but which do not enter into the product itself. These cannot be charged directly to any one article, but must be distributed over the number of articles affected by their use. Labor : direct labor is limited to that labor which is actually expended on producing the article manufactured. All forms of labor, such as repairing, handling, supervising, etc., that are not engaged directly on the article itself, are designated as indirect labor. As in the case of indirect material, the expense of this non-productive labor is distributed over that part of the production that is indirectly affected by it. Indirect Expense : Indirect expense, together with indirect material and indirect labor, compose the last element of Cost, which is sometimes called "Burden" and sometimes "Overhead"; and this large element of cost must be distributed accurately, by some known ratio, over the production^ if correct costs are to be obtained. The elements, that comprise the cost can be graphically depicted (see image). Beside the here three listed principal divisions, it mentions the selling and administrative expenses, together compromising the total expenses.
Forms and systems for control of operations The biggest part of Nicholson in Factory Organization and Costs, is devoted the description of a control system of operations, which relies on a series of forms, and accompanying procedures. Nicholson explained: