Landau Co.
LANDAU COMPANY
In early August, Terry Silver, the new marketing vice president of Landau Company, was studying the July income statement. Silver found the statement puzzling: July’s sales had increased significantly over June’s, yet income was lower in July than in June. Silver was certain that margins on Landau’s products had not narrowed in July and therefore felt that there must be some mistake in the July statement.
When Silver asked the company’s chief accountants, Meredith Wilcox, for an explanation, Wilcox stated that production in July was well below standard volume because of employee vacations. This had caused overhead to be underabsorbed, and a large unfavorable volume variance had been generated, which more than offset the added gross margin from the sales increase. It was company policy to charge company variances to the monthly income statement, and these production volume variances would all wash out by year’s end, Wilcox had said.
Silver, who knew little about accounting, found this explanation to be “incomprehensible. With all the people in your department, I don’t understand why you can’t produce an income statement that reflects the economics of our business. In the company that I left to come here, if sales went up, profit went up. I don’t see why that shouldn’t be the case here, too.”
As Wilcox left Silver’s office, a presentation at a recent Institute of Management Accountants meeting came to Wilcox’s mind. At that meeting the controller of Winjum Company had described that firm’s variable costing system, which charged fixed overhead to income as a period expense and treated only variable production costs as inventoriable product costs. Winjum’s controller had stressed that, other things being equal, variable costing caused income to move with sales only, rather than being affected by both sales and production volume as was the case with full absorption costing systems.
Wilcox decided to recast the June and July income
In early August, Terry Silver, the new marketing vice president of Landau Company, was studying the July income statement. Silver found the statement puzzling: July’s sales had increased significantly over June’s, yet income was lower in July than in June. Silver was certain that margins on Landau’s products had not narrowed in July and therefore felt that there must be some mistake in the July statement.
When Silver asked the company’s chief accountants, Meredith Wilcox, for an explanation, Wilcox stated that production in July was well below standard volume because of employee vacations. This had caused overhead to be underabsorbed, and a large unfavorable volume variance had been generated, which more than offset the added gross margin from the sales increase. It was company policy to charge company variances to the monthly income statement, and these production volume variances would all wash out by year’s end, Wilcox had said.
Silver, who knew little about accounting, found this explanation to be “incomprehensible. With all the people in your department, I don’t understand why you can’t produce an income statement that reflects the economics of our business. In the company that I left to come here, if sales went up, profit went up. I don’t see why that shouldn’t be the case here, too.”
As Wilcox left Silver’s office, a presentation at a recent Institute of Management Accountants meeting came to Wilcox’s mind. At that meeting the controller of Winjum Company had described that firm’s variable costing system, which charged fixed overhead to income as a period expense and treated only variable production costs as inventoriable product costs. Winjum’s controller had stressed that, other things being equal, variable costing caused income to move with sales only, rather than being affected by both sales and production volume as was the case with full absorption costing systems.
Wilcox decided to recast the June and July income