In early August, Terry Silver, the new marketing vice president of Landau Company, was stu
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 accountant, 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 all 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.