Join Jim Stice for an in-depth discussion in this video Introduction to managerial accounting, part of Accounting Foundations: Managerial Accounting.
- Antoine Lavoisier, considered the father of modern chemistry, is most famous for analyzing and naming the element Oxygen, and for writing the first text book on modern chemistry in 1789. His research on combustion enabled France to have the best gunpowder in Europe. - Now, one of Lavoisier's students was a young man named E. I. du Pont. I won't try and pronounce the entire French name. He immigrated to the United States after the death of his mentor. - After using the expertise learnt from Lavoisier, E.I. du Pont started a blasting powder company near Wilmington, Delaware in 1802 that still exists under the formal name of E. I. du Pont de Nemours and Company.
Although, most of us just call it DuPont. - Well, by 1900 DuPont was 100 year old family firm that had lost its competitive edge in the gunpowder business. Three great-grandsons of DuPont bought the company exchanged for bonds and stock in a transaction that would, in today's terminology, be called a leveraged buyout. - The transforming and strategic move made by DuPont's new management was the loosening of the company's focus on gunpowder manufacturing through vertical integration. DuPont integrated backward through buying suppliers of key raw materials, such as charcoal and nitrate, and integrated forward by acquiring its own product distribution channels.
- DuPont's vertical integration was not without its problems, however. Before the vertical integration, DuPont management was only required to allocate scarce capital resources among alternative blasting powder manufacturing projects. Because of the similar nature of these competing projects they could easily compare by focusing their impact on a single performance measure, such as cost per unit. - 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 of production, or whether to spend the same amount of money in acquisition of a supplier that might not lower the 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. - As a result, projects with vastly different effects can be compared based on their impact on return on investment. Brown's insight has been refined over the years, but is still a fundamental part of business analysis.
- F. Donaldson Brown's techniques for evaluating multidivisional enterprises were transplanted from DuPont to another company, when in 1920 a member of the DuPont family took over the leadership of a struggling car manufacturer named General Motors. - 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.
Want to hear more from Jim and Kay? Learn about all three types of accounting—financial, managerial, and income tax—in their Accounting Fundamentals course.
- Planning, controlling, and evaluating costs
- Controlling product flow costs
- Performing CVP analysis
- Understanding cost flows in different industries
- Understanding standard product costing and variances
- Understanding activity-based costing
- Capital budgeting