AREAS OF CONSIDERATION

Upon carefully reviewing the case, the following areas of consideration were
observed by the proponents:
1. Terry Silver, the new vice president for marketing, questioned the company’s income
statement for the month of July, seeing as the numbers presented for the sales and
income were not adding up.
2. Meredith Wilcox, Landau Company’s chief accountant, responded to Silver’s concern
by presenting a new income statement that utilizes variable costing method. Upon
seeing the results, Silver proposed the idea of changing the accounting method used
by the company to variable costing from full costing.
3. In the executive committee meeting, the controller favored Silver’s proposal because
it would entail less effort spent on allocating fixed overhead costs, as well as result to
an enhanced cost control efforts since the fixed overhead costs are segregated from
all other manufacturing costs.
4. The treasurer opposed the idea, arguing that if the company opt to use variable
costing, there is a risk of charging selling prices over variable costs, resulting to the
company’s inability to cover for the fixed costs.
5. In the computations of two product costs utilizing both variable costing and
absorption costing by Silver, the following were observed:
a) Using the full costing method, Product 243 appears to be more profitable with
a margin of 48.2% compared to Product 129 with a margin of 41.5%.
b) Meanwhile, using the variable costing method, Product 129 comes up to be
more profitable than Product 243, with a 68.2% margin, as compared to
Product 243’s 59.8% margin.
c) The differences in these two is caused by the treatment of these two methods
of the fixed manufacturing overhead costs. Variable costing method expenses
these costs while full costing method includes these costs in the product cost.
6. Variable costing is not generally acceptable under GAAP. Since this costing method
is rarely used by firms, external users may not prefer and trust the authenticity of the
financial data.
7. Apart from considering the internal users, the company also needs to make sure that
appropriate financial data that are easily understandable and follow through the
generally accepted accounting principal are also available to external users.
SWOT ANALYSIS
Threats

Despite all that, variable costing still has its own limitations that absorption costing can cover
up.
For one, variable costing is not included in the generally accepted accounting principles
(GAAP). Since this costing method does not conform to any IFRS or PFRS rules, the
financial information derived from this costing method is usually useless to external users.
This is because variable costing usually presents data that are easily understandable by
internal users but are generally hard to comprehend for those outside of the organization. In
the case of Landau Company, utilizing only variable costing would negatively impact their
external users as there is the risk of presenting irrelevant and incomprehensible data.
Moreover, the total cost that can be derived from a variable costing income statement is
incomplete and inaccurate. Variable costing does not include fixed manufacturing costs in
calculating for the product cost. Instead, these costs are treated as expense. Doing so will
result to an undervalued product cost that only contains variable cost components. This
result is evident when Product 129 and Product 243 were compared. The two products had
different costs and margin when calculated using two different costing methods. Another risk
that variable costing might pose on the business is the possibility of the costing method to
lead to a myopic view of costs, because it focuses on only variable costs and ignores fixed
costs.
As it is, these lapses of variable costing can be filled in by absorption costing. With
absorption costing, the actual product cost can be accurately calculated. This is due to the
fact that under this costing method, both the variable costs and fixed costs are included in
the computation of the product cost. This results to a total product cost calculated with all
costs involved. And with the accurate product cost, the company can now be able to set an
appropriate selling price with the right amount of mark up able to cover for all the other
expenses, as well as raise profit.
Utilizing variable costing generally causes income to move with product sales. In other
words, changes in inventory do not affect the profit of the period, resulting in numbers closer
to the actual revenues and costs. However, this fact poses a danger for the company
because this essentially suggests a lack of control over long-run fixed costs. This means that
while this may make it easier and more helpful in comprehending financial statements and
coming up with short-run decisions, it can also be a disadvantage as it can bankrupt the
company instead.
Absorption costing, on the other hand, moves with both the production and sales at the
same time. It takes into account the volume of sales in a given period, assuming that fixed
costs are incurred regardless of the number of the units produced. This means that as more
units are sold, the lesser fixed cost allocated per unit, resulting in a lower cost per unit. By
including both the variable and fixed costs, absorption costing method presents a more
accurate picture of the total product cost, aiding the company in making better pricing and
production decisions.
One of the most important factors that the company should take into account when debating
whether to pursue variable costing method is the costs that will be incurred during the
transition phase. A fully-operating software is not cheap to acquire, thus changing to variable
costing method might lead to large additional costs that the company might not be able to
cover. When considering this fact, the company can think about spending this supposed cost
to other thing such as investing in a new company or improving the current software they
use.