Landau Company

Problem Statement

What costing System should Landau Company adopt to best depict the company’s Income Statement?

Objectives

• To adapt an accurate costing system that would depict the monthly income statement of Landau Company.

• To cite the Pros and Cons of the chosen costing system.

• To enhance management’s control efforts and present a rational and balance Income Statement.

Areas of Consideration

• The significant increase of sales in July over June, yet income was lower in July than in June.

• Lack of control over long-run costs that can bankrupt a company.

• Margins on Landau’s products in June and July.

• The company is looking for a new approach for internal managerial purposes.

Alternative Courses of Action

1. Variable Costing System

Pros:

• Eliminates time consuming efforts of allocating fixed overhead to individual products.

• Management’s cost control efforts would be enhanced.

• Useful in comparing the profitability of individual product.

• Avoids the complexities associated with manufacturing overhead.

• Removes fixed manufacturing overhead and teats it as a period cost and not as a product cost.

• Helps managers understand h manufacturing costs are being incurred

• Very valuable tool for management in making decision and often use for internal reports.

• Income figure is not affected by production thus overproduction can be prevented.

Cons:

• Selling the products at their usual mark up over variable costs.

• Volume variances will not appear due to no fixed overhead is applied to products.

• Not permitted for external reporting purposes.

• Almost no manufacturers use this procedure in published financial reports because it has not yet been functioned by the institutions like SEC and BIR.

• If fixed cost is not treated as cost of product lower selling price is set

2. Full Absorption Costing System

Pros:

• Encourages high production. These means that the more they produce the higher their income

• Required for financial reporting and income tax purposes.

• Used by manufacturing organizations to account for costs as raw materials more through the production effort to become finished goods.

Cons:

• More