landau compa

nyCASE

19-4Rillo, Gj Ominga, Romel Lozano, Dada, Comendador, Roe SYNOPSIS

it all began with the income statement and the new VP of Landau Company

TERRY SILVER..

july sales increased significantly over june.. !..but how come the income for july is lower?

terry noticed.. meridith answered..july production was below standard volume because many went to boracay for vacation..

..as a result, our overhead was underabsorbed, and it resulted as well to a large volume variance..

..which more than offset the added gross margin for the sales increase..

meridith added..

it was company policy to charge all variances to the monthly income statement, as these production volume variances will all be washed out by years end..

accounting novice, terry said, !!!

in the company i came from, if sales went up, profits went up too. !i cant understand why it shouldnt be the case here to..

after the conversation, Meridith remembered the presentation at the recent Institute of Management Accountants.. !!!..the presentation of Winjum Company about the company using VARIABLE COSTING SYSTEM

Apparently, Winjum Company charges fixed overhead to income as a period expense.. !they treated variable production costs as inventoriable product costs. !!this makes variable costing to cause income to move with sales only, rather than being affected by both sales and production volume unlike what absorption costing systems do. !

meridith, submitted a new report for June and July case using the VARIABLE COSTING METHOD

terry, happy with the new report of Meridith now proposes to the board to use Variable Costing instead of Absorption.

PROBLEMSHOULD LANDAU ADOPT !

VARIABLE COSTING FOR ITS!MONTHLY INCOME STATEMENT? PROBLEM

WHAT WOULD BE THE PROS & CONS!OF THE VARIABLE COSTING PROPOSAL?

OBJECTIVEDETERMINE THE RIGHT COSTING SYSTEM!

FOR LANDAU COMPANY PROSthe controller agreed that the variable costing proposal would eliminate the time-consuming efforts of allocating

fixed overhead to individual products.

since variable costing segregates the cost of materials, direct labor and

variable overhead from fixed overhead costs, managements cost control

efforts would be enhanced.

the variable costing system would yield a lower profits to be submitted to

employee unions and tax

in variable costing system, profit is calculated on the basis of sales

volume than production units

PROSsince variable costing reflects

contribution margin of the product, this will make the product seem more

profitable compared to using gross margin.

in variable costing system, profit is calculated on the basis of sales

volume than production units CONSif the new approach would be used, the usual mark up would be selling

over variable costs. This will disregard the fixed costs

Not considering the long-run costs will lead the company to bankruptcy

because of the lack of transparency of the profitability of the company.

Variable method may lower down the total pretax profit, which may not be favourable to the point of view of the

management.

CONSUsing variable costing cannot be used as a method if the company wishes to do long-term planning and decision

making.even if variable costing present highly positive reports and figures compared

to full costing, it is not accepted by GAAP and income tax regulations so

therefore, it cannot be used.

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it is difficult to identify separately the variable and fixed costs since

products flow from one department to another. Semi-variable costs makes its

fixed and variable portion hard to distinguish and record.

product pricing would be affected as well because most companies refer full

costs accounting to better gauge performance and profitability

orMaintain using FULL COSTING SYSTEM? Change into VARIABLE COSTING SYSTEM? RECOMMENDATIONRECOMMENDATIONRECOMMENDATIONRECOMMENDATIONRECOMMENDATIONNOT A MATTER OF JUST CHOOSING

ONE, BUT DETERMINING WHICH METHOD BEST SUIT THE USAGE

AND SCENARIO.

We recommend using FULL COSTING SYSTEM most especially for the

consumption of the upper management. Management must have

a holistic picture of the companys financial performance for planning and

strategy purposes.