CHEAP PART COSTS GENERAL MOTORS A FORTUNE

Essentially, managerial accounting provides accounting information that helps managers

make sound decisions. Managerial accounting is crucial as it provides cost information
necessary in planning strategies, controlling operations, and decision-making. It also helps the
company decide whether to build a direct material from scratch or buy a ready-made product in
their final products. In manufacturing companies like General Motors (GM), managerial
accounting is essential as it includes accounting information such as manufacturing costs and
non-manufacturing costs. Manufacturing costs comprise direct materials, direct labor, and
manufacturing overhead. And these details were mentioned in the case of General Motors.

In the case of GM, they used a direct material component part called a detent plunger in
manufacturing its automobile ignition switches. The direct laborers of GM can install this part.
The part costs the company between $2 and $5 per unit to manufacture. Apparently, one of the
reasons why they opted to acquire this part from a supplier is cost. Purchasing the part at a
lower cost is an economic advantage on the company's part without considering its future
impact. However, things turned differently. The automobile ignition switches manufactured out
of this part is a failure. It led to accidents that killed people, and it affected the reputation and
position of the company.

Speculations and questions were left unanswered in this case. Questions as to why GM
did not act sooner to redesign, recall and replace the defective detent plunger upon discovery in
2004. They continued to manufacture ignition switches using the faulty part on their cars after
discovery in 2004. In addition, GM didn’t issue orders to recall the vehicles with defective
ignition switches. Despite the provided information, the management turned a blind eye to this
case as it would cost more. But things got worse, and more complaints were coming in. Apart
from the litigation aspects, GM will have to pay for the damages caused by these faulty ignition
switches. In reality, were GM acted sooner in recalling cars with defective ignition switches, it
would only cost them for repair and civil damages. Had the management considered the cost-
benefit analysis before making decisions, this problematic scenario would have been prevented
from happening.

Indeed, the provided information from managerial accounting is essential in making

decisions to improve the company's operational performance.