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1
9
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4
Rillo, 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.
PROBLEM
SHOULD LANDAU ADOPT
VARIABLE COSTING FOR ITS
MONTHLY INCOME STATEMENT?
PROBLEM
WHAT WOULD BE THE PROS & CONS
OF THE VARIABLE COSTING PROPOSAL?
OBJECTIVE
DETERMINE THE RIGHT COSTING SYSTEM
FOR LANDAU COMPANY
P
R
O
S
the controller agreed that the variable
costing proposal would eliminate the
time-consuming efforts of allocating
xed overhead to individual products.
since variable costing segregates the
cost of materials, direct labor and
variable overhead from xed overhead
costs, managements cost control
efforts would be enhanced.
the variable costing system would
yield a lower prots to be submitted to
employee unions and tax
in variable costing system, prot is
calculated on the basis of sales
volume than production units
P
R
O
S
since variable costing reects
contribution margin of the product, this
will make the product seem more
protable compared to using gross
margin.
in variable costing system, prot is
calculated on the basis of sales
volume than production units
C
O
N
S
if the new approach would be used,
the usual mark up would be selling
over variable costs. This will disregard
the xed costs
Not considering the long-run costs will
lead the company to bankruptcy
because of the lack of transparency of
the protability of the company.
Variable method may lower down the
total pretax prot, which may not be
favourable to the point of view of the
management.
C
O
N
S
Using 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 gures 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 difcult to identify separately the
variable and xed costs since
products ow from one department to
another. Semi-variable costs makes its
xed 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 protability
or
Maintain using
FULL COSTING
SYSTEM?
Change into
VARIABLE COSTING
SYSTEM?
RECOMMENDATION
RECOMMENDATIONRECOMMENDATION
RECOMMENDATIONRECOMMENDATION
NOT 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
nancial performance for planning and
strategy purposes.