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Management Accounting in an Early Integrated Industrial: E. I. duPont de Nemours Powder Company, 1903-1912*

Published online by Cambridge University Press:  11 June 2012

H. Thomas Johnson
H. Thomas Johnson
Affiliation:
Associate Professor of Economics, University of Western Ontario
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Abstract

The appearance of large, integrated industrial firms at the turn of the century encouraged the introduction of innovative accounting practices. Professor Johnson examines the centralized management accounting system that made it possible for one such firm, the DuPont Powder Co., to plan its long-term development and to avoid the internal inefficiency that sometimes accompanies enormous size.

Type
Research Article
Information
Business History Review , Volume 49 , Issue 2 , Summer 1975 , pp. 184 - 204
Copyright
Copyright © The President and Fellows of Harvard College 1975

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References

1 The phrase “management accounting” is used here to mean the “use of accounting information by management” for purposes such as planning and control. Accounting tools that assist management “have, in a significant way, made possible the creation and efficient operation of large enterprises, and it is scarcely conceivable that any business, except the smallest ones, could operate without them.” Anthony, Robert N., Management Accounting: Text and Cases (Homewood, Illinois, 1964), 359, 10Google Scholar.

2 Alfred D. Chandler, Jr., “The United States: Evolution of Enterprise” (unpublished ms., September 30, 1970), 71-83; “Recent Developments in American Business Administration and Their Conceptualization,” co-author Redlich, Fritz, Business History Review, XXXV (Spring, 1961), 1–31Google Scholar; Strategy and Structure (Garden City, N.Y., 1966), 174–185Google Scholar.

3 Chandler, “The United States,” 56.

4 This rationale for the integrated firm is an extension of Ronald Coase's transaction cost theory of the firm. See Williamson, Oliver E., Corporate Control and Business Behavior: An Inquiry Into the Effects of Organization Form on Enterprise Behavior (Englewood Cliffs, N.J., 1970), 15–18Google Scholar. For other useful insights on vertical integration see Stigler, George J., “The Division of Labor is Limited by the Extent of the Market,” The Journal of Political Economy, LIX (June, 1951), 185–193CrossRefGoogle Scholar.

5 Chandler, Strategy and Structure, 43-50.

6 The records of the Powder Company are housed in the DuPont Corporation's Hall of Records in Wilmington, Delaware; I examined the records to 1912. References to these records are cited hereafter as “Hall of Records” with the appropriate box or shelf number.

7 The material in this paragraph is drawn from the superb account of the Powder Company's early history in Chandler, Alfred D. Jr., and Salsbury, Stephen, Pierre S. duPont and the Making of the Modern Corporation (New York, 1971), 47–120Google Scholar.

8 Ibid., 77-120.

9 Ibid., 144-147. A concise description of all facets of the Powder Company's centralized ‘accounting system is in both Dunham, R. H., “Object of Accounting,” a paper for The High Explosives Operating Department Superintendents’ Meeting, No. 33 (New York, April 20-26, 1911Google Scholar), and Ramsay, William G., “Construction Appropriations,” a paper for The H.E.O.D. Superintendents' Meeting, No. 32 (New York, April 12-16, 1910Google Scholar). These papers are on file at the Eleutherian Mills Historical Library, Greenville, Delaware.

10 Chandler and Salsbury, Pierre S. duPont, 158-168, 201-217.

11 Ramsay, “Construction,” 2.

13 The basic figure used by the company for return on investment was net earnings (minus depreciation and before deduction of interest on long-term debt) divided by net assets (total assets minus goodwill and other intangibles, current liabilities, and reserves for depreciation). For example, see Hall of Records, shelf area 182701-182712, item 107.

13 Pollard, Sidney, The Genesis of Modern Management: A Study of the Industrial Revolution in Great Britain (Cambridge, Massachusetts, 1965), 233–245Google Scholar. Johnson, H. Thomas, “Early Cost Accounting for Internal Management Control: Lyman Mills in the 1850's,” The Business History Review, XLVI (Winter, 1972), 474Google Scholar. Andrew Carnegie's company records would seem to demonstrate this early and common practice. Although Carnegie himself assiduously studied operating costs, apparently his company's records did not tie product costs into net earnings, nor did he relate costs and earnings to total investment. One surmises this from the details provided about the Carnegie Steel Company's records (especially William P. Shinn's cost statements) in Bridge, J. H., The Inside History of the Carnegie Steel Company (New York, 1903), 84-85, 94–95Google Scholar and Wall, Joseph F., Andrew Carnegie (New York, 1970), 326, 337, 342Google Scholar.

14 Litterer, Joseph A., “Systematic Management: Design for Organizational Recoupling in American Manufacturing Firms,” in Baughman, James P., ed., The History of American Management: Selections from the Business History Review (Englewood Cliffs, N.J., 1969), 63–66Google Scholar. Chandler, “The United States,” 45-54. Johnson, “Early Cost Accounting,” 466-467.

15 Dunham, “Object of Accounting,” 17.

16 Detailed records of investment in plant and equipment rarely existed in businesses before 1900. Indeed, conservative accounting practice favored charging-off capital expenditures to retained earnings as quickly as possible. Johnson, “Early Cost Accounting,” 474. Littleton, A. C suggests that “the nature of depreciation was not yet sufficiently understood to bring forth the suggestion that all expenditures for long-lived assets be charged to asset accounts.” Evolution of Accounting to 1900 (New York, 1933), 236, 245Google Scholar. For an alternative, but not conflicting, view see Brief, Richard P., “Nineteenth Century Accounting Error,” Journal of Accounting Research, Vol. 3 (Spring, 1965), 12–31CrossRefGoogle Scholar.

17 In accordance with this procedure, all proposed investment in plant and equipment was described on standard appropriation forms calling for estimates of expenditure, estimates of the savings in cost or other benefits anticipated from the proposed investment, and evidence of proper authorization. Once an appropriation was approved, a report was presented on the final actual expenditure on the new asset. Proper authorities were then expected to account for any unreasonable variance from the original estimate. Ramsay, “Construction Appropriation,” passim.

18 Chandler and Salsbury, Pierre S. duPont, 210-213, 251-254.

19 Ibid., 251-252.

20 Examples of these estimates of net earnings (beginning in October, 1910) are in Hall of Records, shelf area 182701-182712, items 161 and 161A through 161D. Company correspondence in these files indicates that the estimates of profit per unit of output took into consideration probable future trends in both product prices and input costs. Evidence that the company prepared forecasts of net earnings as early as 1907 is in Hall of Records, boxes 184736-184740, item 43.

21 Chandler and Salsbury, Pierre S. duPont, 251-252.

22 Examples of these monthly cash forecasts (beginning in July, 1910) are in Hall of Records, shelf area 182701-182712, item 173. Reconciliations of cash forecasts to actual receipts and disbursements are at item 186. Reconciliations of net earnings forecasts to actual earnings are at Hall of Records, boxes 184736-184740, item 43.

23 Each mill produced only one type of explosive (i.e., smokeless gunpowder, high explosives, or black blasting powder), usually in several varieties, and it also produced many of the intermediate materials (e.g., acids) that were used to make the final products.

24 The company's only complete cost accounting records, including the accounts for most materials purchased and all payrolls, were maintained by the home office accounting department. The mills kept only those records needed to ascertain the quantities of inputs (material and labor) and the quantities of output for each of their processes. Dunham, “Object of Accounting,” 7-13.

25 Examples of these reports are in the Minutes of the High Explosives Operating Department Superintendents' Meetings on file at the Eleutherian Mills Historical Library. Worksheets for some mill superintendents' reports are in the Hall of Records, e.g., boxes 184736-184740, item 52, “Statement of Charges to Each B Blasting Powder Mill, Month and Year-to-Date for 1908.” Also see items 64 and 72.

26 Minutes of the High Explosives Operating Department Superintendents' Meetings, Eleutherian Mills Historical Library.

27 Chandler and Salsbury, Pierre S. duPont, 146-147. Although a set of these reports no longer exists, many of the worksheets from which the reports were prepared are in Hall of Records, box 133859.

28 Hall of Records, box 133859.

29 The company followed a consistent procedure to account for depreciation. The balance sheet contained two reserve accounts to cover the cost of replacing obsolete or destroyed plant and equipment. One, the works accident reserve, covered the cost of property destroyed in fire and explosions. This reserve was charged 2 cents per keg for powder and 1 cent per pound dynamite on every unit of explosive that was manufactured (Hall of Records, box 133859). The other reserve account, the depreciation account. described as “obsolescence insurance, as it [covered] the replacement or rearrangement of plants or parts of plants, because out of date, or badly laid out according to more recent ideas, or illogically located on account of change in trade conditions, or, in fact, almost any reason other than the plant is worn out or damaged by accident.” (Dunham, “Object of Accounting.” 17). The monthly depreciation rates were .5 per cent for plant and 1.25 per cent for furniture and fixtures. Current operating expense was regularly charged, therefore, for all repairs and maintenacnce to permanent plant and equipment, for the estimated loss that would arise from fire and explosions. Plant that became inoperative simply because of age was written-off against operations in the year it was dismantled. Such write-offs were rare, however, because of the company's maintenance policy and because the company' aggressive policy of cutting costs through modernization caused most facilities to be dismantled, to accommodate technical improvements, long before they wore out.

30 Taylor was tutored in accounting in 1893 by Wm. D. Basley, a public accountant who had many years of experience with railroad accounting. In 1898, when Taylor was hired to install a cost system at Bethlehem Steel, he stated his belief that the best general system of bookkeeping is “the modern railroad system of accounting adopted the modified to suit the manufacturing business,” Copley, Frank B., Frederick W. Taylor, 2 vols. (New York, 1923), I, 369–392 and II, 142Google Scholar.

31 Ibid., I, 364.

32 Ibid., 423-424, 445-448.

33 “The planning department of the Taylor System, which dealt chiefly in material efficiency … neglected market mechanisms and the choices of those planned for or against.” Haber, Samuel, Efficiency and Uplift: Scientific Management in the Progressive Era (Chicago, 1964), 167Google Scholar. Ibid., 17, 165-166. “To Mr. Taylor and his associates costs, though of course important, are secondary to productive efficiency.” Thompson, C. B., The Theory and Practice of Scientific Management (New York, 1917), 71Google Scholar.

34 In 1896, Taylor was hired to develop cost systems for the Steel Motor Company and the Lorain Steel Company, subsidiaries of the Johnson Company of Johnstown, Pa. At that time, T. Coleman duPont and Russell H. Dunham were General Manager and Comptroller, respectively, of Lorain Steel. By 1898, when Taylor went to work at Bethlehem Steel, Dunham had moved on to become comptroller of that corporation. Pierre duPont became President of the Johnson Company's Lorain operations in 1899. Copley, , F. W. Taylor; I, 445, 448Google Scholar and II, 142, 144. Chandler and Salsbury, Pierre S. duPont, 71.

35 Eleutherian Mills Historical Library, Longwood Manuscripts, Group 10, Series A, File 26-4, “Annual Report of the Johnson Company, 1899.” In this report, the net earnings of Lorain Street Railway are compared with net investment; unlike later return on investment calculations of the Powder Company, however, the Lorain figure shows return on stockholder investment rather than total investment.

36 Ibid., File 250, “Arthur James Moxham,” letter from Moxham to P. S. duPont (March 20, 1900). Chandler and Salsbury, Pierre S. duPont, 32-33.

37 A related question was whether to buy sources of raw materials (i.e., the issue of vertical integration); this question the purchasing department began to deal with in 1908 using return on investment data. See section 3, below.

38 Dunham, “Object of Accounting,” 10-11 and “Discussion,” 1-2. Barksdale's viewpoint on this issue seems to run counter to his argument on a separate occasion that interdepartmental transfers should be priced at market rather than cost. See Chandler and Salsbury, Pierre S. duPont, 152-153.

39 In fact, it was not until the 1930s that the DuPont Company central accounting office (which by then was accounting for separate product divisions) delegated to the mills the task of accounting for prime material costs.

40 Chandler and Salsbury, Pierre S. duPont, 140-141.

41 The company's sales accounting records are described in great detail in Dunham, “Object of Accounting,” 4-7.

42 Ibid., 5, 19.

43 Chandler and Salsbury, Pierre S. duPont, 163, 141, 155-157. The method described in this paragraph, which the company used to determine minimum product prices, is not discussed by Chandler and Salsbury; it is inferred from worksheets and correspondence in Hall of Records, boxes 184736-184740, items 27 (B. Blasting Powder) and 39 (Dynamite).

44 Chandler and Salsbury, Pierre S. duPont, 93, 156.

45 The constraints imposed on sales managers' pricing activities are outlined in the letter cited in note 46, below. It is notable that the company used return on investment data to judge whether product prices were too high. In late 1906, for example, the Assistant Treasurer of the Powder Company noticed that black blasting powder produced and sold by the company in the anthracite region of Pennsylvania was earning 22 per cent on investment, whereas the same type of powder produced and sold by the company in the rest of the country was earning about 2 per cent. Since all plants were running at full capacity, he argued that the price of black blasting powder should go up about 5 per cent in all districts outside the anthracite region, whereas the price should go down about 8 per cent in the anthracite district. “Unless this is done the story our Profit and Loss statement tells is that while we are selling powder at lower prices than ever before all over the country with a view to preventing further investment in the business, we are inviting the same competition in the anthracite region by having prices which net us practically four times such income on the capital invested as we net in all other territories.” Letter from J. J. Raskob to P. S. duPont (Wilmington, 7/27/06), Hall of Records, boxes 184736-184740, item 29.

46 In a letter dated 4/2/06, the Director of Sales outlined the Powder Company's system for handling the sales force; the system was designed “to give greater latitude to our men in the field [with] handling the trade, … to place upon our men more responsibility for the results obtaines, and to provide so that their compensation will be varied as closely as possible in proportion with the results obtained along the lines we desire.” A copy of this letter is in U.S. Circuit Court of Delaware, No. 280 in Equity, United States of America, Petitioner v. E. I. duPont de Nemours and Company, et al., Defendants, Defendants' Exhibits, I, 351-361.

47 Ibid., 355-357.

48 Williamson, Corporate Control, 132.

49 Dunham, “Object of Accounting,” 2-4, 7-13.

50 Bridge, Inside History of Carnegie Steel Company, 84.

51 Chandler and Salsbury, Pierre S. duPont, 185-186.

52 Hall of Records, shelf area 182701-182712, item 139.

53 Chandler and Salsbury, Pierre S. duPont, 220-228.

54 Ibid., 228, 187, 204.

55 Hall of Records, shelf area 182701-182712, items 116, 137, 138, 139, 145.

56 Chandler and Salsbury, Pierre S. duPont, 245.

57 Chandler, Strategy and Structure, 44 and Williamson, Corporate Control, 4.

58 Williamson, Corporate Control, viii.

59 Ibid., 14-31. Except for my references to management accounting systems, the comments in this paragraph about limitations to firm size are drawn entirely from Williamson's penetrating analysis.