Sunrise Medical

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Landau Company Brief Background

September 25, 2008

In early August the new marketing vice president of Landau Company, was studying the July income statement. He found the statement puzzling: July’s sales had increased significantly over June’s, yet income was lower in July than in June. The VP for marketing 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 he asked the company’s chief accountant for an explanation, the chief accountant stated that production in July was well below standard volume because of employee vacations. This had caused overhead to be under absorbed, 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 all variances to the monthly income statement, and these production volume variances would all wash out by year’s end.

The chief accountant decided to recast the June and July income statements and balance sheets using variable costing.

On the next board meeting, the recasted income statement and balance sheet were presented to the board of directors. Some had their doubts and reservations on the recasting of the Income statement and Balance Sheets on the assumption that fixed costs might be left behind and be forgotten.


1. Critique the various pros and cons of the variable costing proposal that were presented in the meeting. What arguments would you add?

2. Should Landau Company adopt variable costing for its monthly income statements?

Analysis of the Case

For Management accounting purposed some company’s state inventories only at

variable production costs – material, direct labor, and variable overhead – and treat fixed overhead costs as expenses of the period in which these costs were incurred. Conceptually, these fixed costs are regarded as the costs of maintaining capacity during the period rather than as a...