Landau Company

1113 WordsApr 15, 20115 Pages
Managerial accounting “Case: 19-4 Landau Company”” Question 1: * The income statements prepared under absorption costing and variable costing usually produce different net operating income figures. Under absorption costing if inventories increase then some of the fixed manufacturing costs of the current period will not appear on the income statement as part of cost of goods sold. Instead, these costs are deferred to a future period and are carried on the balance sheet as part of the inventory account. Such a deferral of cost is known as fixed manufacturing overhead deferred in inventory, as the accountant said that the July production was well below standard volume because of employee vacations this caused overhead to be under…show more content…
These data are not available on a conventional income statement based on absorption costing. Under variable costing, the profit for a period is not affected by changes in inventories. Other things remaining the same (i.e. selling prices, costs, sales mix, etc.), profits move in the same direction as sales when variable costing is in use. Managers often assume that unit product costs are variable costs. This is a problem under absorption costing, since unit product costs are a combination of both fixed and variable costs. Under variable costing, unit product costs do not contain fixed costs. But despite these advantages, absorption costing must be used almost exclusively for external reporting purposes and it is predominant choice for internal reports as well. Absorption costing is also attractive to many accountants because they believe it better matches costs with revenues. Advocates of absorption costing argue
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