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I.

Background of the Study

The company is engaged in manufacturing business. The company is
currently uses absorption costing. In early August, it had a new marketing vice
president in the name of Terry Silver and found the July’s Financial Statement as
puzzling and asking why the company is not using variable costing.

II.

Problem Statement

1. Critique the various pros and cons of the variable costing proposal that were
presented in the meeting. What arguments would you add?
2. Should Landau adopt variable costing for its monthly income statements?

III.

Objectives

1. To cite and evaluate the pros and cons of Absorption Costing versus Variable
Costing
2. To evaluate the usage of Absorption Costing versus Variable Costing
3. To adapt an accurate costing system that would depict the monthly income
statement of Landau Company

IV.

Areas of Consideration

The Financial Statements of Landau Company was examined to show the
application of Absorption Costing and Variable Costing as well as the pros and cons of it
usage.

per unit is emphasized.PROS CONS Terry Silver doesn't understand income changes in absorption Marketing will underprice produ costing attributable solely to production volume changes. To mc. Cost control will be improved. It eliminates time-consuming and argumentative fixed overhead Lack of control over long-run allocations. company. Lower profits will be worriso hankers. this is an important reason to consider seriously the introduction of variable costing for monthly management reports. Contribution margin data are better profitability than arc gross margin data signals of product .

We believed this is a matter of educating the decision makers rather than an issue of the data. On the contrary side. Cost control will be improved in Variable Costing considering there is a clear segregation of fixed and variable costs that aids in cost control. this is true but it really has nothing to do with the proposal in using the variable costing approach. he indicated that he doesn’t understand changes in the absorption costing where it became a catalyst in introducing variable costing for easy and understandable manner of preparing monthly management reports where it gives the detailed reflection of relationship between cost. Finally. whereas full cost data are useful for others. price and volume as well as income is not affected by changes in production volume. On a business outlook. the implementation of the variable costing eliminates time-consuming and argumentative fixed overhead allocations. We can’t agree to this simply because in marketing. The company won’t have a long run to worry about it considering the introduction of variable costing will lead in the enhancement of cost control where it will be a routine in separating fixed and variable costs. In the case of VP Silver. This is a false argument because variable costing is not permitted or unacceptable under either GAAP (Generally Accepted Accounting Principles) or income tax regulations due to its . Contribution margin data are better signals of product profitability than are gross margin data is another positive outlook. there is a dilemma given that Marketing will underprice products if only the variable cost per unit is emphasized. apparently this is only a partial truth because absorption costing statements would need to be prepared at least annually or quarterly for shareholder reporting as well as for income tax calculations. Lack of control over long-run cost can bankrupt a company is another predicament. variable cost data are useful for some decisions.Landau Company’s officers have different opinions regarding the adaptation of variable costing versus absorption costing. Lower profits will be worrisome to shareholders and hankers. Furthermore.

Absorption Costing and Variable Costing because the two approaches are beneficial in totality and has its own purposes. The usage of Absorption Costing simply because of its simplicity of the calculation of overhead rates. Considering that Changes in an Organization is inevitable as well as Resistance to such changes. . the above proposal will improve the quality of the company’s preparation of income statements that could serve as a basis in making good decisions that will eventually yield to good financial health. fixed costs may become variable. Furthermore. On the other hand. The company is still in need in improving their way of preparing its income statements.e.e. Variable Costing is also important for it is applicable for decision making and it is useful for Cost-Volume-Profit Analysis. VI. Alternative Courses of Action Though Landau Company shown there views and points regarding the usage of Absorption or Variable Costing in the preparation of their monthly income statements. Landau Company must seek the adoption of Variable Costing and may set a preliminary screening to it and check if it is significant to them and measure if there is a need to amend current company policies regarding the preparation of income statements. lower costs to maintain. V. fixed cost are ignored in the analysis where it does not consider the fact that in the long run. Recommendation Landau Company should use BOTH approach i. unacceptable for external reporting and tax computing.disadvantages i. and its compliance for financial reporting requirements under the GAAP.