From the course: Accounting Foundations

DuPont: Introduction to managerial accounting

From the course: Accounting Foundations

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DuPont: Introduction to managerial accounting

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- [Jim] Antoine Lavoisier, considered the father of modern chemistry, was instrumental in disproving the ancient alchemist notion that all matter is composed of different mixtures of earth, air, fire, and water. - He is perhaps most famous for analyzing and naming the element oxygen and for writing the first textbook on modern chemistry in 1789. - Lavoisier was also an excellent practical chemist. His research on combustion enabled France to have the best gunpowder in Europe. - But Lavoisier fell out of favor during the French Revolution, partly because he'd been a tax collector in pre-Revolutionary days, and ultimately, he was beheaded. - [Jim] The French mathematician, Joseph-Louis Lagrange, said of Lavoisier's untimely death at age 51, It took but a moment to cut off that head, though 100 years perhaps will be required to produce another like it. - One of Lavoisier's students was a young man named E.I. du Pont, I won't try to pronounce his entire French name, who immigrated to the United States after the death of his mentor. - [Jim] Using the expertise learned from Lavoisier, E.I. du Pont started a blasting powder company near Wilmington, Delaware in 1802. It still exists under the formal name of E.I. du Pont Nemours and Company. Although, most of us usually just call it DuPont. - By 1900, DuPont was a 100-year-old family firm that had lost its competitive edge in the gunpowder business. Three great grandsons of DuPont bought the company in exchange for bonds and stock in a transaction that would, in today's terminology, be called a leveraged buyout. - [Jim] After the vertical integration, however, DuPont management was required to choose among dissimilar projects, such as whether to spend money on a manufacturing improvement that would lower the cost per unit, or whether to spend the same amount of money on acquisition of a supplier that might not lower cost per unit, but would streamline the purchasing process and allow the company to carry less inventory. - Credit for solving the problem of comparing dissimilar projects is given to DuPont's Assistant Treasurer, F. Donaldson Brown. Brown was trained as an electrical engineer, and he used his mathematical insight to show that measures of sales profitability and of operating efficiency could be combined into one overall measure of return on investment. - [Jim] As a result, projects with vastly different effects could be compared based on their impact on return on investment. Brown's insight has been refined over the years, but it's still a fundamental part of business analysis. - F. Donaldson Brown's techniques for evaluating multi-divisional enterprises were transplanted from DuPont to another company, when in 1920, a member of the DuPont family took over leadership of a struggling car manufacturer named General Motors. - [Jim] This is a classic example of the application of managerial accounting. An organization sees a need for better planning, control, and evaluation of its operations. - People within the organization consider their information needs, create new measures that summarize important aspects of their operations, and proceed to make better decisions. - That is managerial accounting, information tailored to an organization's specific needs to help that organization better plan, control, and evaluate its operations.

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