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
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
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