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
PROS
CONS
this
is
an
important
reason
to
consider
seriously
the
allocations.
company.
Contribution
margin
data
are
better
signals
of
product
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 cant 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 wont 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.
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 companys
preparation of income statements that could serve as a basis in making good decisions
that will eventually yield to good financial health.