Question

1. Discuss the main issues faced by Landau Company?

2. Explain the reasons (and show your work) for the $29,287 difference in July between the incomes before taxes under the two different methods.

3. Critique the various pros and cons of the variable costing proposal that were presented in the meeting.

Answer 1

1.

i)The significant increase in sales in July over June, yet income was lower in July than in June.
ii) Lack of control over long-run costs that can bankrupt a company.
iii) Margins on Landau's products in June and July.
iv)The company is looking for a new approach for internal managerial purposes.

2. There is a difference in July of $29,287 because the fixed costs are more visible in variable costing and emphasize the impacts of the costs on the income, unlike the financial statement. The total fixed costs in any accounting period are usually reported after the gross profits which emphasize the impact fixed costs have the net income. The variable costing also ensures fewer distortions of the margins. The gross margins do not interfere with the allocation of fixed costs. It helps in customers, products, and business segments appraisal. Variable costing also keeps incremental analysis straightforward than in financial statements because they correspond with out-of-pocket expenditure which is used in manufacturing goods. Question 2 Variable costing usually assigns variable costs to the inventory which means the overhead is treated as expenses. The method provides a deeper understanding of the impact of fixed costs on net profits. This is because the total fixed costs are usually shown in the income statements. The variable costing also produces figures close to the flow of cash which is vital for businesses with cash flow

3.

One positive aspect of adopting the variable costing system that was described in the text, is some of the staff members do not seem to understand absorption costing, the current costing method. When using absorption costing, income is affected by sales volume and production volume changes. Variable costing may be more suitable for management who do not have a financial background. Because management needs to be able to make informed decisions, it is imperative that the financial information provided to them is meaningful. Another argument in the case for using variable costing is that it could possibly eliminate time-consuming efforts required to allocate fixed overhead. Since the variable costing method only uses variable costs when assigning products their costs, allocating fixed overhead to individual products is not necessary. According to the case, cost control can be improved with the adoption of variable costing. Although costs can also be controlled when using absorption costing, it is easier to distinguish on the income statement in which costs are variable and which costs are fixed when using the variable costing method. Since variable costs and fixed costs are controlled in different ways, it is useful to be able to analyze the costs separately in order to control them.