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 Julys 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

profitability than arc gross margin data

signals

of

product

Landau Companys officers have different opinions regarding the adaptation of

variable costing versus absorption costing.
In the case of VP Silver, he indicated that he doesnt 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 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.

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 companys
preparation of income statements that could serve as a basis in making good decisions
that will eventually yield to good financial health.