Cost Accounting & Management Decisions

It all started with an incandescent light bulb and from there, rocketed into one of the most successful, world-renowned company in the world. Thomas Alva Edison first established Edison General Electric Company in 1890 (General Electric, 2013). Two years later, another electrical competitor, the Thomson-Houston Company, merged with Edison General Electric to become the General Electric Company we now know today (General Electric, 2013).

Manufacturing innovators in so many various products ranging from lighting to transportation, the General Electric Company has withstood over a century of economic trends, and is by far, one of the most important manufacturing companies in the world. Some of the primary and well-known products manufactured by the General Electric Company are GE appliances and large jet aircraft engines. Variable and fixed cost structures and what they mean to GE managers.

General Electric uses simple and competitive cost structures as one of their main strategies which has proven to be extremely effective within their company, and has enabled them to withstand years of changing economies. Management focuses primarily on improving structural costs in order to achieve increases in speed, improved quality of products and services, significant cost reduction, and an increased competitive advantage for GE’s customers and for their company as a whole.

The management at General Electric is constantly looking for ways to improve their variable costs as well as keeping a firm handle on their fixed costs, in order to maintain larger profit margins in the future. In 2012, General Electric’s profit margins grew to 15. 1% due to management’s continuous efforts to keep their cost structure competitive and effective. General Electric has also been keeping product costs down by creating more innovative designs of their products. When General Electric can redesign their current products using more cost-effective designs, they can keep their variable costs down and generate more favorable profit margins in the future.

Another important fact to consider is the fact that General Electric has one of the most innovative cost accounting structures in place. General Electric is always looking to improve their variable and fixed costs within the company. One such example is General Electric making India one of its largest manufacturing hubs in the world. The reasoning for this is that General Electric is always looking to lower their variable and fixed costs, as is most manufacturing companies. The lower costs you can achieve, the more profitable your company will become.

General Electric is always doing its homework when researching where they will be able to obtain the lowest costs while still maintaining the skilled workers, as well as producing the most goods. It’s just good business practice. Activity-based costing system vs. traditional costing system and which does General Electric prefer? There are two general costing systems currently used by businesses around the world today; activity-based costing systems and traditional costing systems.

A traditional costing system is generally used by manufacturing companies as well as companies that typically only produce anywhere from one to several products. Companies who use a traditional costing system typically use this costing system to assign manufacturing overhead to units produced. Manufacturing costs are only assigned to the products under this costing system. A problem with the traditional costing system is that nonmanufacturing costs are not associated with the products, so obtaining an accurate representation of what a product actually costs is difficult.

This leads to inaccurate financial information which in turn leads to poor management decisions. Companies who use an activity-based costing system, such as General Electric, tend to generate more accurate financial information regarding their individual products. Companies like General Electric, who manufacture thousands of different products, benefit from using this costing system, simply because they are able to allocate all manufacturing and nonmanufacturing costs to their individual products in order to obtain accurate data for how much money it costs the company to manufacture their variety of products.

Every activity that is associated with manufacturing a product is considered and then allocated to each individual activity used in creating the product (Johnson, 2013). Many companies use this costing system as a supplemental system simply because the amount of time and effort needed to generate this type of data is expensive and time-consuming (Johnson, 2013). General Electric has developed specific software programs for this type of costing, and is able to generate the most accurate financial date for all of their products that they manufacture.

How do General Electric’s forecasts compare to their end of year financial statements? In the financial statement of General Electric from their year ending in 2012, they displayed revenues from sales of goods as $72,991 million and sales from services as $27,158 million. These numbers for goods sold were up from 2011, whereas the sales of goods in 2011 were at $66,875 million.

However, the sales for services were at $27,648 million, and actually have been on a small and steady downfall, the numbers in 2010 for service revenues being at $39,625 million. Costs for products that General Electric produces were at $56,785 million and costs for services that were sold were at $17,525 million in 2012 (General Electric (2012).. The costs for goods and services sold at General Electric remained constant over 2010, 2011 and 2012, which proves that their current costing system is working for the company (General Electric (2012).

General Electric stated in their annual report from 2011 that they would invest $16 billion in R&D in order to produce new, groundbreaking products that would expect to generate at least a 6% increase in revenues (General Electric (2011). From the numbers in their annual report and their financial statements an almost 9% increase in revenues from sales of goods was realized. Unfortunately, the negative impact from the sales of services, other income and GECC revenues from services, put General Electric’s total revenues percentage at a minor .

05%. Resources General Electric. (2011). GE Annual Report. Fairfield, CT:. General Electric. (2012). GE Financial Statement. Fairfield, CT:. General Electric. (2013). History. Retrieved from http://www. ge. com/about-us/history/1878-1904 Johnson, R. (2013). Traditional costing vs. activity-based costing. In Demand Media (Ed. ), Starting a Production Company. Houston, TX: Hearst Communications, Inc. Retrieved from http://smallbusiness. chron. com/traditional-costing-vs-activitybased-costing-33724. html