LANDAU COMPANY

CASE ANALYSIS
I.

PROBLEM STATEMENT
What cost accounting system should Landau Company use?

II.

OBJECTIVES:

III.

AREAS OF CONSIDERATION
1. Cost accounting system
A cost accounting system accumulates costs used in manufacturing
products or providing services. The cost accounting is used by
management to determine proper service costs, support product pricing
decisions, and control costs by creating budgets to project business
activity anticipated during the coming year.
Landau Company is currently using full absorption costing. With this
method, the profit is affected by the movements is both sales and
production volume. As a result, when production is below standard
volume, the overhead cost is underabsorbed, causing large unfavorable
variance to be generated and is offset with incremental gross profit
margin. The resulting profit for the affected period is then lower despite
increased sales, as the case with Landau Companys June and July
income statement reports.
Terry Silver is proposing a shift to Variable Costing which he thought
reflect a more sensible result. With this method, fixed overhead is charged
to income as a period expense and only variable production costs are
treated as inventoriable product costs.
2. Marketing
Sales volume will largely depend on Landaus competitive product pricing.
As a marketing strategy, lowering product prices will yield higher sales
volume and put them in a competitive position to leverage on this strength
to capture a larger market share.
Product pricing largely depend on the companys cost factors and
acceptable margins. Having a reliable cost accounting system allows

marketing to push the best marketing strategies available at their disposal

to maximize the companys profit.
3. Profitability
Variable costing and full costing methods yield different profit figures. As a
primary objective of any company, profitability is very important to the
different users of its financial
4. Users of financial statements
The hired consultant rightly pointed out the problem facing Delaney
Motors which is the lack of proper cost allocations to the different
operations within the dealership. His cost computations revealed a
IV.

ALTERNATIVE COURSES OF ACTION

1. Retain the use of Full Cost method of cost accounting

As mentioned earlier, the cost accounting system is used to accumulate
costs in providing service or manufacturing products. The cost accounting
is used by management to determine proper service costs, support
product pricing decisions, and control costs by creating budgets to project
business activity anticipated during the coming year. One of the cost
accounting systems is called Activity Based Costing (ABC).
ABC is a costing methodology that identifies activities in an organization
and assigns the cost of each activity with resources to all products and
services according to the actual consumption by each.
Advantages:
1. ABC provides more accurate costing of services.
2. ABC can help Mr. Frank Delaney soundly estimate the cost
elements of his dealership business and improve cost allocations to
various operations of Delaney Motors.
3. Help in pricing decisions by either lowering or increasing service
prices to keep a healthy profit margin.
Disadvantages:
1. ABC is expensive to implement. Mr. Delaney will need a consultant
to help him setup the ABC system and provide training for its use.

2. Some data can be misinterpreted because reports produced by

ABC system contain information that varies from the information
reported for traditional cost method.
2. Use Variable Costing method of cost accounting
Delaney Motors body shop is ranked low among 11 dealerships
competing in Ohio. Increasing customer traffic and revenue volume should
be top priorities. To do so, Frank Delaney should step up its marketing
efforts by promoting his services to a larger audience
Advantages:
1. Marketing will increase recognition and awareness among potential
customers of Delaney Motors. The increase awareness is expected
to translate into increase customer traffic the consequently revenue
volume.
Disadvantages:
1. Marketing campaign cost can be prohibitive. Profit margin from
entire dealership is very slim at only about 5% of revenue.
3. Use both Full Cost and Variable Costing methods for different users
of FS.
The body shop of Delaney Motors is making very low profit because its
revenue isnt high enough to cover the service costs being incurred by its
continued operations. Frank Delaney will also leverage on Delaney
Motors excellent body shop service which should deserve a premium
price.
Advantage:
1. Profit will increase as a result of increased revenue numbers.
Disadvantages:
1. There is high probability that existing customers will look for
another service provider
2. Delaney Motors brand image may suffer a setback, as some
consumers will be dismayed over the price increase.

V.
VI.

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POTENTIAL PROBLEM ANALYSIS