Cost Accounting – ACC 350
December, 16th 2012
* * For most of the 20th century, General Motors (GM) has been one of the biggest manufactures of cars in the world. GM led in industry innovations and stood the largest car producer from 1931 to 2008. On 2008, the financial crises brought into GM one of the largest corporate falls in history. GM found itself on a terrible cash flow position. It had to declare bankruptcy and became the biggest multinational company to receive aid from a government ever. Therefore, with US Government support (Trouble Asset Relief Program – TARP) and partnership, the new General Motors Company made one of the major rebounds ever. GM still remains 26.5% held by the U.S. government. However, its forecasts of getting free of federal ownership on raising its share over $53 a share, which is the value that the U.S. government desires to break-even on the deal.
The new GM became a “lean mean machine”. “Hourly labor costs were cut by more than two-thirds, to $5 billion from $16 billion in 2005” (BUSINESS: COMPANIES: GENERAL MOTORS, 2012). The top management at GM had the understanding that every manufacture company has two types of Cost Direct Cost and Indirect Cost. Since the direct costs are easy to be linked to costs like labor. Therefore during its period of reengineering, GM made innumerous cuts in labor, renegotiated contracts with vendors and suppliers and invested in technology to improve production. “Where other car companies have turned to low-cost factories in Mexico, China and Brazil, G.M. is using robotics and a radically revamped production line in Detroit…” (BUSINESS: COMPANIES: GENERAL MOTORS, 2012). Therefore, the reengineering process of reallocating costs at the new GM seems to be a success. The company acted fast to identify the possible improvements and the results are impressive.
One should note that the improvements were done not just on the “assembly line” but also on the vision of the company. The new GM has been investing massively in new lines of products. GM started to make a low-cost model, the Sonic. GM also invested on the fuel-economy side of their vehicles, where, March 2012 was the first year ever that GM sales were almost half of fuel efficient vehicles in the US. Therefore, the company not just approached the cost of production problems very efficiently, but also review the entire line of production based on the new market demands. General motors estates on its Annual Report for the 2011 fiscal year:
“Our business is highly dependent on sales volume. There is no assurance that the global automobile market will not suffer another significant downturn.” and “Our ability to maintain profitability over the long-term is dependent upon our ability to introduce new and improved vehicle models that are able to attract a sufficient number of consumers.” (UNITED STATES SECURITIES AND EXCHANGE COMMISSION, 2012)
Therefore, any economic adverse condition on the US can affect car sales. A financial crisis, like the one that had its higher point in 2008, can easily throw a car manufacturer into a difficult financial position. A decline in car sales can be very harmfully to the manufacturing company. Not just reducing revenue and operating income, but also, reducing the ability for the company to invest in research and development. That can cause the ability to implement improved technological innovations in design, engineering, and manufacturing could be jeopardized. Since the marketing is very competitive, GM can not afford to find itself in a low cash flow position again. Therefore GM should focus more into the reengineering process conjunction with the TARP that saved the company. The activity based accounts and activity based management help in estimating true cost of products, services, processes, activities, supply channels, customer segments, contracts, and projects. Therefore, they are key…