Landau | Cost Of Goods Sold | Inventory

CASE 3: Landau Company I.

Point of View The point of view taken in this analysis is that of a third party consultant. Statement of the Problem: Landau Company is divided on which costing system to use due to the various pros and cons that must be considered for both full and variable cost system to be in decision making. III. Objective/s: The objective of the Consultant is to provide an educated suggestion about which costing system will be used within Landau Company. IV. Areas of consideration: 1) The Terry Silver, New VP for marketing, has challenged the way that the company is computing for monthly income statement emphasizing on why lower margins were reflected in the income statement despite the increase in sales volume. 2) The Ms. Meredith Wilcox, Landau’s Chief Accountant, has presented a revised income statement to Silver using variable costing system. Silver had positive response to the new income statement and suggested the shift from using absorption costing to variable costing during the executive committee meeting. 3) The controller has supported the proposal of Silver saying that since variable costing segregated the cost of materials, direct labor and variable overhead from fixed overhead costs, managements costs control efforts would be enhanced. 4) Variable costing is not acceptable for financial reporting and taxation purposes. 5) In a variable costing system a monthly income statement is related directly to a company’s monthly sales volume while in full costing income is affected by both sales and production volume. 6) The treasure spoke up and said that if the new approach will be taken marketing might sell at their usual mark up over variable costs and asked how the company will pay for the fixed costs then? The treasurer highly objected the idea of changing the method of reporting income internally.

II.

20% 5.200 19% . Amounts used in computation can be found in exhibit 1.400 25.800 17.400 8.000 43. Exhibit 1 Full Costing Product Selling Price 129 243 Standard Production Unit Margin Margin Percent Cost 4. Losses were incurred in product 129 which had the highest margin in the context of variable costing system.200 61.76% The following amounts are assumed for the purpose of this calculations.34 2.800 61.47% 5.68 sales Volume Revenue Standard Production cost Fixed Production Overhead Selling and administrative Net Income net income/Sales 129 10000 43.800 8.200) -30% Variable 243 20000 117.84 48. Product 129 Product 243 Normal Capacity 30.400 13.800 18.000 46.96 68.400 18.800 40% total 30000 161.400 37% total 30000 161.000 Selling and administrative Costs 8000 10000 Predetermined OH rate 1.8 41.800 47.000 10.000 56.000 10.38 2.52 59. The following information was gathered (in this case product 129 was sold more since it had higher margin that 243: a.000 Fixed overhead Cost 34.16 0.000 25.400 17.000 30.000 10.89 3. Net income for variable costing system is lower than the reported income in the full cost system.200 86.7) The Consultant has computed the income in both variable and full costing supposing that a decision on which product to sell more was based on a full cost system.34 1.800 34.22% Variable Costing Product Selling Price 129 243 Standard Production Unit Margin Margin Percent Cost 4.37 3.200 51.54 1.000 (13.89 2.05 2.800 35% 129 10000 43.000 23% Full 243 20000 117. b.

Provided sales equal production income for revised sales price is significantly lower.000 25.49 185.58 2.450. Net income in variable costing system is still lower that the reported income in the full cost system Full 243 10000 58900 30500 10000 18400 31% Variable 243 10000 58900 23700 17.58 114.00 152.200.00 8. 10) If sales prices were revised based on absorption costing retaining the same mark up on costs the following will follow: a.00 10.000.738.47% 243 4.200. Product Revised Selling Price Standard Production Cost Unit Margin Margin Percent 129 2.000 25. Amounts used in computation can be found in exhibit 1.800 8000 16400 19% total 30000 145700 51300 51800 18000 24600 17% 9) From the information in areas of consideration 7 and 8 it can be noticed that full costing income for the decision that was based on the full cost system has bigger net income as compared when a decision was derived from an absorption cost system.250.00 18.37 2.000.709.49 14.00 -19% 25% 8% 35% 41% 39% sales Volume Revenue Variable Cost of goods sold Fixed Production Overhead Selling and administrative Net Income net income/Sales .250.00 277.000.00 147.36 1.420.00 76.000 55.000.00 10.000.98 41.00 8.00 (13.000.07 46. Please see details on table below.22% income statement using revised sales price income statement using OLD sales price 129 243 total 129 243 total 30.000 10000 8200 14% sales Volume Revenue Variable Cost of goods sold Fixed Production Overhead Selling and administrative Net Income net income/Sales 129 20000 86800 50800 8000 28000 32% total 30000 145700 81300 0 18000 46400 32% 129 20000 86800 27600 34.461.00 18.000.450. The following information was gathered (in this case product 243 was sold more since it had higher margin that 129 a.00 61.170.000. This can be attributed to the lack of provision for per unit fixed overhead in the sales price.159.450.00 76.250.000 30.00 107.8) The Consultant has computed the income in both variable and full costing supposing that a decision on which product to sell more was based on a variable cost system.21 48.000 70.42) 28.00 76.00 152.00 76.38 0.200.000.07 130.000 55.

This method will also prove to be conservative since costs will be expensed when incurred thus revenue’s will be reduced by the expenses which were incurred during the month. much of the overhead costs though incurred for a certain period may be carried out as an assets and hide it in the inventory accounts. Ease in accounting is also an advantage for full costing since in reality determining the fixed part of overhead can be cumbersome. the use of Variable costing might lead decision makers to lean towards having more emphasis on contribution margins while neglecting nonvariable costs which are equally important and may even be more important in capital intensive firms. this system will prove to be less effective when the company will move from the labor intensive to capital intensive manufacturing where basically majority of the part of operation will be overhead. Moreover. b. As seen in areas of consideration 10 income decreased as compared to the income when sales prices were computed based on full cost. VI. some departments can increase reported income by building up inventory. Sales price decisions based on this system will provide provision for per unit fixed overhead. In this way. Recommendation a. Propose the keeping of full cost system. However. Alternative Courses of Action: a.V. when sales price are computed only to cover variable costs there is no provision made for the fixed costs incurred. The recommended alternative course of action is action B. This will enhance the company’s efforts in controlling the variable aspects of manufacturing. Propose the change in income statement presentation to variable costing system. Variable costing is not accepted in tax reporting and financial reporting. Moreover. Thus. However. . full Costing is a function of production. Moreover. efficiency in manufacturing can be well watched since any decrease in production as compared to sales will alarm management since lesser income is recognized due to an increased inventory costs.

000 $9.00 Direct Material Cost Direct Labor Cost Overhead Cost* 2.600.00 $120.200.200. Veronica Company A) Overhead Rate Total Estimated Ave.00 B) Computation for Production Costs Job G $10.Solutions to Problems Problem 19-1.00 $28.00 $32.00 Job H $10.00 $67.000.400X$9 2.000.000.8 1.000.800X$9 Total Product Cost *overhead rate x Direct labor hours C) Veronica company can charge customers the following amounts: Job G Job H $59.00 Veronica's Average Overhead rate is $ 9.200.00 $21.600.000.00 1. Monthly Overhead Cost Ave.8 $107. Monthly direct labor hours $180.00 = 20.960.00 $67.00 $25.00 $59.600.280.00 Total Product Cost Amount to charge customers (180% of Product Costs) .

68 $112.00 $873.00 $280.280.000.000.00 Sugar $2.Problem 19-2.00 $12.000.00 $2.280.00 $288.00 $100.00 $12.406.720.720.720.720.00 $289.00 Sales After Split off costs Margin Joint Cost Product Costs Joint Costs After Split off costs Total Product Cost Syrup $99.000.00 $111.68 $100.00 .280.000.32 $593.000.000.32 Sugar Total $593.280.000.000. VT Sugar Enterprises A) Total Cost of Syrup is $110.00 $100.406.00 $1.000.00 $12.00 $99.406.00 $1.00 $110.00 Sales After Split off costs Gross margin of Sugar Joint Cost after Split Off Cost Less Gross Margin of Sugar Total cost of Syrup B) Product Costs Syrup Sugar $300.32 $12.280.000.00 $280.00 $12.00 $280.68 Total $302.00 $1.

However.00 $ 42.000/33.000/33.16 $ 4.Problem 19-3 Monrad Corporation a) Adjusting Journal Entries Inventory (462.00 b) In a variable costing system.00 $ 420.45 4 $ 0.000) Cost of Goods sold (462.00 Problem 19-4 Nemad Company a) Direct material cost per assembly for next year is $ 4.000. in absorption costing such costs are inventoried and thus are not part of the Cost of Goods sold.16 each assemble requires 8 Levers 10% of items produced are often discarded not being able to meet standards No of Levers Monrad has to produce to make 8 Good Levers 8 90% 8 8/9 No of Levers Monrad has to produce to make 8 Good Levers Cost per piece of Each lever Direct material cost for the year increase in Material cost due to 4% inflation Direct material cost per assembly for the next year 8.16 .000.000*3. d) Ending FG balance: Finished Goods Inventory at variable cost Non Variable Product cost-Finished goods portion Finished Goods Inventory.8889 $ 0.00 $ 117.000*30.000 since in variable costing s c) ystem fixed portions of manufacturing costs is recognized as expense in the year it is incurred.000) $ 42.in Absorption costing $ 75.000.000.000. income will be lower that absorption costing system by 42.

63 31.0659 Total Work Week Hours Two Daily 15-minute breaks @5 days Non producing working time (15% of normal working time) Total Productive Hours Standard labor Time required for 1 unit (in minutes)(12 minutesx 90%) Total standard units produced per work week Average weekly pay (40*$18) Total standard units produced per work week Direct labor cost per assembly for next year Hours 40.88 0.18 177.50 5.b) Direct labor cost per assembly for next year $4.00 2.08 $4.08 $720 177.0659 .

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