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With all the people in your department, I dont understand why you cant produce an income statement that
reflects the economics or our business. In the company that I left to come here, if sales went up, profits
went up. I dont see why that shouldnt be the case here, too.
At the next executive committee meeting, Silver proposed adoption of variable costing for Landaus monthly internal income statements. The controller also supported this change, saying that it
would eliminate the time-consuming efforts of allocating fixed overhead to individual products.
These allocations had only led to arguments between product managers and the accounting staff.
The controller added that since variable costing segregated the cost of materials, direct labor, and
variable overhead from fixed overhead costs, managements cost control efforts would be enhanced.
Silver also felt that the margin figures provided by the new approach would be more useful than
the present ones for comparing the profitability of individual products. To illustrate the point, he
had worked out an example. With full costing, two products in Landaus line, numbers 129 and
243, would appear as follows:
_____________________________________________________________________________________________
This case was prepared by Professor James S. Reece. It is intended as a basis for class discussion and not to illustrate
either effective or ineffective handling of an administrative situation.
Copyright 2012 by James S. Reece and The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United
States and international copyright laws, no part of this document may be reproduced, stored, or transmitted in any
form or by any means without written permission from The Crimson Group.
North America
t +1 781 239 5884
e ecchusa@ecch.com
Purchased for use on the SMM452 Strategic Cost Management, at Cass Business School.
Taught by Yeshwant Nama-Venkateswwaralu, from 10-Oct-2014 to 9-Apr-2015. Order ref F235441.
Usage permitted only within these parameters otherwise contact info@thecasecentre.org
Landau Company
Product
129
243
Standard
Production Cost
$2.54
3.05
Selling Price
$4.34
5.89
Unit Margin
$1.80
2.84
Margin Percent
41.5
48.2
Thus, product 243 would appear to be the more desirable one to sell. But on the proposed basis, the
numbers were as follows:
Product
129
243
Standard
Production Cost
$1.38
2.37
Selling Price
$4.34
5.89
Unit Margin
$2.96
3.52
Margin Percent
68.2
59.8
According to Silver, these numbers made it clear that product 129 was the more profitable.
If we use this new approach, the next thing we know you marketing types will be selling at your usual
markup over variable costs. How are going to pay the fixed costs then? Besides, in my 38 years of experience, its the lack of control over long-run costs that can bankrupt a company. Im opposed to any proposal
that causes us to take a myopic view of costs.
The president also had some concerns, having further considered the proposal.
In the first place, if I add together the June and July pretax profit under each of these methods, I get almost
$117,000 with the present method, but only $99,000 under the proposed method. While Id be happy to
lower our reported profits from the standpoints of relations with our employee union and income taxes, I
dont think its a good idea as far as our owners and bankers are concerned. And I share Jamies [the treasurers] concern about controlling long-run costs. I think we should defer a decision on this matter until we
fully understand all of the implications.
Assignment
1.
Explain the reasons for the $29,287 difference in July ($65,099 - $35,812) between income before taxes under the two different methods. Be very specific in listing the elements that caused the difference.
2.
Critique the various pros and cons of the variable costing proposal that were presented in the meeting. What
arguments would you add?
3.
Assess Mr. Silvers arguments concerning products 129 and 243. If he could emphasize only one product,
which one should it be? Why?
4.
Should Landau adopt variable costing for its monthly income statements? Why or why not?
_____________________________________________________________________________________________
Landau Company June 2012
2 of 3
Purchased for use on the SMM452 Strategic Cost Management, at Cass Business School.
Taught by Yeshwant Nama-Venkateswwaralu, from 10-Oct-2014 to 9-Apr-2015. Order ref F235441.
Usage permitted only within these parameters otherwise contact info@thecasecentre.org
LANDAU COMPANY
Exhibit 1. Income Statements and Selected Balance Sheet Items
June and July
Sales Revenue
Cost of sales at standard
Standard gross margin
Production cost variances*
Labor
Material
Overhead volume
Overhead spending
$865,428
484,640
$380,788
$382,279
(16,259)
12,416
1,730
3,604
301,250
$81,029
June
Variable
Costing
$865,428
337,517
$527,911
(16,259)
12,416
3,604
$527,672
192,883
301,250
$33,539
July
Full
Costing
$931,710
521,758
$409,952
(11,814)
8,972
(63,779
2,832
$346,163
310,351
$35,812
Variable
Costing
$931,710
363,367
$568,343
(11,814)
8,972
2,832
$568,333
192,883
310,351
$65,099
As of 30-Jun
Full
Variable
Costing
Costing
Inventories
Retained Earnings
$1,680,291
$3,112,980
$1,170,203
$2,602,892
As of 31-Jul
Full
Variable
Costing
Costing
$1,583,817
$3,131,602
$1,103,016
$2,650,801
Purchased for use on the SMM452 Strategic Cost Management, at Cass Business School.
Taught by Yeshwant Nama-Venkateswwaralu, from 10-Oct-2014 to 9-Apr-2015. Order ref F235441.
Usage permitted only within these parameters otherwise contact info@thecasecentre.org
Full
Costing