Fixed and variable costs: the case of GM’s bankruptcy in 2009.

 Early 2000s: High fixed costs due to union contracts (making it difficult for the company to close unviable
factories, reduce pensions and health benefits, etc)
 Increased competition from Japanese cos. such as Toyota, GM needed to sell more cars, a lot more.
 Starting 2001, sales incentives and rebates, aggressive expansion into China and Europe;
 Growth efforts slowed in 2005, losing $10 bn, closed more than a dozen plants, cut thousands of jobs,
froze pensions.
 Gas price rose above $40 a gallon, the product mix heavily weighted towards gas-guzzling trucks, pickup
trucks, SUVs, all experiencing sharp decrease in sales.
 During economic crisis, Bankruptcy became inevitable.
 Govt. used taxpayers’ money to the extent of $33 bn (employing a unique bankruptcy code, Sec. 363,
Chapter 11 of the US Codes) in order to save the company.

Budgeted cost and actual cost: both needed for decision making

Cost objects at BMW: imagine you’re a manager at BMW Chennai plant

Cost object Illustration

Product A BMW X5 sports activity vehicle
Service Telephone hotline providing info and assistance to BMW dealers
Project R&D project on enhancing the DVD system in BMW cars
Customer Alpha Motors, the BMW dealer that purchases a broad range of BMW vehicles
Activity Setting up machines for production or maintaining production equipment
Department Environmental, Health, and Safety Department

Cost accumulation: collection of cost data in some organized way by means of an accounting system

Direct and indirect costs:

Variable and fixed costs: