The document discusses which costing system, variable or absorption, Landau Company should use to present its income statement. It analyzes pros and cons of each system, considering the company's situation where production decreased temporarily. It recommends keeping the full absorption costing system as it best characterizes production levels over time and is required for tax and financial reporting, while acknowledging variable costing may enhance short-term cost control efforts.

1. CASE 7: Landau Company
I. Statement of the Problem:
What costing system should Landau Company implement to best present the company’s
Income statement?
II. Objective/s:
The objectives of the case study are:
1. To compare full absorption costing and variable costing methods through citing pros
and cons for each in the light of the company’s current situation.
2. To give an educational suggestion about which costing system will be used within the
Landau company
III. Areas of consideration:
1) The Terry Silver, New VP for marketing, has challenged the way that the company is
computing for monthly income statement emphasizing on why lower margins were reflected in
the income statement despite the increase in sales volume from June to July.
2) Ms. Meredith Wilcox, Landau’s Chief Accountant, has presented a revised income statement
to Silver using variable costing system. Silver had positive response to the new income
statement and suggested the shift from using absorption costing to variable costing during the
executive committee meeting.
3) The controller has supported the proposal of Silver saying that since variable costing
segregated the cost of materials, direct labor and variable overhead from fixed overhead costs,
managements costs control efforts would be enhanced.
4) The treasure spoke up and said that if the new approach will be taken marketing might sell at
their usual mark up over variable costs and asked how the company will pay for the fixed costs
then? The treasurer highly objected the idea of changing the method of reporting income
internally.
5) Variable costing is not acceptable for financial reporting and taxation purposes. Absorption
costing is required by standard for external financial reporting and for income tax reporting.
6) In a variable costing system a monthly income statement is related directly to a company’s
monthly sales volume while in full costing income is affected by both sales and production
volume.
7.) To further compare, the following illustration will present incomes in both variable and full
costing supposing that a decision on which product to sell more was based on: a) full cost
system and b) variable cost system.

2. 7a) supposed that a decision on which product to sell more was based on a Full cost
system. In this case, product 243 was sold more since it had higher margin than 129. Exhibit 1
presents amounts used in the computation.
With these given, we computed the income statements (as shown below) for both cost
systems. The following information was gathered:
a. Net income for variable costing system is lower than the reported income in the full
cost system.
b. Losses were incurred in product 129 which had the highest margin in the context of
variable costing system.

3. 7b) supposed that a decision on which product to sell more was based on a Variable
cost system. Now, in this case product 243 was sold more since it had higher margin that 129
as still shown in Exhibit 1. Income statements under these assumptions are computed as
follows:
The following is observed:
a. Net income in variable costing system is still lower that the reported income in the full
cost system.
8) From the information and computation based on area of consideration no. 7, it can be noticed
that full costing income for the decision that was based on the full cost system has bigger net
income as compared when a decision was derived from a variable cost system.
10) If sales prices were revised based on absorption costing retaining the same mark up on
costs the following will follow:
a. Provided sales equal production income for revised sales price is significantly lower.
This can be attributed to the lack of provision for per unit fixed overhead in the sales price.

4. IV. Alternative Courses of Actions
a. Propose the change in income statement presentation to variable costing system.
ADVANTAGE(s):
 This will enhance the company’s efforts in controlling the variable aspects of
manufacturing.
 This method will also prove to be conservative since costs will be expensed
when incurred thus revenue’s will be reduced by the expenses which were
incurred during the month.
DISADVANTAGE(s):
 However, this system will prove to be less effective when the company will
move from the labor intensive to capital intensive manufacturing where
basically majority of the part of operation will be overhead.
 Moreover, when sales price are computed only to cover variable costs there
is no provision made for the fixed costs incurred. As seen in areas of
consideration 10 income decreased as compared to the income when sales
prices were computed based on full cost.
b. Propose the keeping of full cost system.
ADVANTAGE(s):
 Sales price decisions based on this system will provide provision for per unit
fixed overhead.
 Moreover, full Costing is a function of production. Thus, efficiency in
manufacturing can be well watched since any decrease in production as
compared to sales will alarm management since lesser income is recognized
due to an increased inventory costs.
 Ease in accounting is also an advantage for full costing since in reality
determining the fixed part of overhead can be cumbersome.
DISADVANTAGE(s):
 However, some departments can increase reported income by building up
inventory. In this way, much of the overhead costs though incurred for a
certain period may be carried out as assets and hide it in the inventory
accounts. Since the company allocates fixed overhead to the finished unit
level in absorption costing, until the company sells a unit, the cost does not
show up as an expense, or Cost of Goods Sold.
 In terms of managerial decision making, income statements provided using
this method may seem to be inadequate. Since, absorption costing allocates
fixed overhead costs to the unit level, it makes it appear as though additional
units produced add overhead cost, when in fact they are revenue
opportunities.

5. V. Recommendation.
The recommended alternative course of action is action B. The continuous implementation of
Full cost system will be good for Landaue company in the long-run. We have to consider that
the current situation the company is facing based on the case is temporary. Production in July
was below the standard volume because of employee vacations. Given low production,
overhead was underabsorbed causing the bottomline income to decrease from June to July. It
must be understand that this is really an effect of using an absorpotion costing. In the coming
months when production will be back to normal volume (as presented in areas of consideration
no. 7a), full absorpotion is still the suitable cost system for it best characterized production
compared to variable costing.
VI. Potential Problem Analysis
The use of Variable costing might lead decision makers to lean towards having more
emphasis on contribution margins while neglecting non variable costs which are equally
important and may even be more important in capital intensive firms. Moreover, Variable costing
is not accepted in tax reporting and financial reporting.