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.
 PROS CONS
Terry Silver doesn't understand income changes in absorption Marketing will underprice produ

costing attributable solely to production volume changes. To mc, per unit is emphasized.

this is an important reason to consider seriously the

introduction of variable costing for monthly management

reports.
It eliminates time-consuming and argumentative fixed overhead Lack of control over long-run

allocations. company.
Cost control will be improved. Lower profits will be worriso

hankers.
Contribution margin data are better signals of product

profitability than arc gross margin data

 Landau Company’s officers have different opinions regarding the adaptation of

variable costing versus absorption costing.

In the case of VP Silver, 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, price and volume as well as income is not

affected by changes in production volume. Furthermore, the implementation of the variable

costing eliminates time-consuming and argumentative fixed overhead allocations,

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.

Cost control will be improved in Variable Costing considering there is a clear

segregation of fixed and variable costs that aids in cost control.

Contribution margin data are better signals of product profitability than are gross

margin data is another positive outlook.

On the contrary side, there is a dilemma given that Marketing will underprice

products if only the variable cost per unit is emphasized. We can’t agree to this simply

because in marketing, variable cost data are useful for some decisions, whereas full cost

data are useful for others. We believed this is a matter of educating the decision makers

rather than an issue of the data.

Lack of control over long-run cost can bankrupt a company is another predicament.

On a business outlook, this is true but it really has nothing to do with the proposal in

using the variable costing approach. 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.

Finally, Lower profits will be worrisome to shareholders and hankers. 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

 disadvantages i.e. unacceptable for external reporting and tax computing; fixed cost are

ignored in the analysis where it does not consider the fact that in the long run, fixed costs

may become variable.

V. 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. The

company is still in need in improving their way of preparing its income statements.

Considering that Changes in an Organization is inevitable as well as Resistance to

such changes, 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.

VI. Recommendation

Landau Company should use BOTH approach i.e. 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; lower costs to maintain; and its compliance for financial reporting

requirements under the GAAP. On the other hand, Variable Costing is also important for it

is applicable for decision making and it is useful for Cost-Volume-Profit Analysis.

Furthermore, 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.