Landau Company
EMBA 2016 - Managerial Accounting - Case Study 2
Landau Company
Problem 1
Input Data Provided
- Sales increased in July
- Production decreased in July below standard because of employee vacations
- As a result of vacations overhead costs have been under absorbed in July
- Large unfavorable volume variance had been generated to offset gross margin
Explanation Required
On the Income Statements under Full costing and Variable costing some line items indicate differences.
LANDAU COMPANY
Income Statements
June and July
in US Dollars
June
July
Full
Variable
Full
Variable
Costing
Costing
Costing
Costing
Sales Revenue
865,428
865,428
931,710
931,710
Cost of sales at standard
484,640
337,517
521,758
363,367
Standard gross margin
380,788
527,911
409,952
568,343
Production cost variances
labor
-16,259
-16,259
-11,814
-11,814
Material
12,416
12,416
8,972
8,972
Overhead volume
1,730
-63,779
Overhead spending
3,604
3,604
2,832
2,832
Actual gross margin
382,279
527,672
346,163
568,333
Fixed production overhead
-192,883
-192,883
Selling and administrative
301,250
301,250
310,351
310,351
Income before taxes
81,029
33,539
35,812
65,099
Difference
-47,490
29,287
The line items of Income before taxes (net operating income) are different for $29,287 on July statements, whereas it is $65,099 under Variable costing and $35,812 under Full costing.
Problem 1. Solution
In Full costing all manufacturing costs are treated as product costs, regardless of whether they are variable or fixed. In Variable costing material costs, direct labor and variable overhead are segregated from fixed manufacturing overhead costs. As a results in Full costing the inventories carry the costs of fixed manufacturing overhead as well which appear on the income statement just when they are sold.
Let's look at the Landau Company Income statements for June and July under different costing approaches.
According to Silver the
Landau Company
Problem 1
Input Data Provided
- Sales increased in July
- Production decreased in July below standard because of employee vacations
- As a result of vacations overhead costs have been under absorbed in July
- Large unfavorable volume variance had been generated to offset gross margin
Explanation Required
On the Income Statements under Full costing and Variable costing some line items indicate differences.
LANDAU COMPANY
Income Statements
June and July
in US Dollars
June
July
Full
Variable
Full
Variable
Costing
Costing
Costing
Costing
Sales Revenue
865,428
865,428
931,710
931,710
Cost of sales at standard
484,640
337,517
521,758
363,367
Standard gross margin
380,788
527,911
409,952
568,343
Production cost variances
labor
-16,259
-16,259
-11,814
-11,814
Material
12,416
12,416
8,972
8,972
Overhead volume
1,730
-63,779
Overhead spending
3,604
3,604
2,832
2,832
Actual gross margin
382,279
527,672
346,163
568,333
Fixed production overhead
-192,883
-192,883
Selling and administrative
301,250
301,250
310,351
310,351
Income before taxes
81,029
33,539
35,812
65,099
Difference
-47,490
29,287
The line items of Income before taxes (net operating income) are different for $29,287 on July statements, whereas it is $65,099 under Variable costing and $35,812 under Full costing.
Problem 1. Solution
In Full costing all manufacturing costs are treated as product costs, regardless of whether they are variable or fixed. In Variable costing material costs, direct labor and variable overhead are segregated from fixed manufacturing overhead costs. As a results in Full costing the inventories carry the costs of fixed manufacturing overhead as well which appear on the income statement just when they are sold.
Let's look at the Landau Company Income statements for June and July under different costing approaches.
According to Silver the