In the fast-paced World, companies are geared towards maintaining the stability of financial structure of the business to gain profit.
In this case, Income Statement states that July sales had substantially increased than June but income in July was lower over June. This dilemma was cited by Terry Silver the new marketing vice-president of Landau Company.
Over 38 years, company conveniently used Full Costing System for their Income Statement. The suggested shift in the system to Variable Costing System was considered by Meredith Wilcox Company’s chief accountant after attending the meeting of the members of the group of Institute of Management Accountants. She recast the Income Statement and presented the same to Silver as areas of consideration.
The latter system, would eliminate the time consuming efforts of allocating fixed overhead to individual products & segregated cost of materials, direct labor and variable overhead from fixed overhead costs, Silver said. However, according to Jamie [the treasurer] system suggests lack of control over long-run costs that can bankrupt the company. The President and Treasurer shared the same light on the matter. Whereas proposal using Variable Costing approach was well thought-out and exceeds the idea that the system under variable costing, the profit for a period is not affected by changes in inventories. Other things remaining the same (i.e. selling prices, costs, sales mix, etc.), profits move in the same direction as sales when variable costing is in use.
In this case, Variable Costing System approach was recommended to answer the need of internal people to access the financial stability of the said company. The impact of fixed costs on profits is emphasized under the variable costing and contribution approach. The total amount of fixed costs appears explicitly on the income statement. Under absorption, the fixed costs are mingled together with the variable costs and are buried...