The Madison Corporation has two identical divisions: Eastern and Southern. Their
ID: 2575620 • Letter: T
Question
The Madison Corporation has two identical divisions: Eastern and Southern. Their sales, production volume, and fixed manufacturing costs have been the same for both divisions for the last five years and that information for each are as follows:
Year 1
Year 2
Year 3
Year 4 year 5
Units produced
100,000
100,000
100,000
100,000
100,000
Units sold
80,000
90,000
110,000
100,000
115,000
Fixed manufacturing costs
$500,000
$500,000
$500,000
$500,000
500,000
Eastern uses absorption costing and Southern uses variable costingand southern uses variable costing. Both use FIFO inventory methods. Variable manufacturing cost are $10 per unit. Both have identicals selling prices and selling and administrative expenses. There were no Year 1 beginning inventories.
Determine the difference in profits for each division for Years 1 through 5. explain why profits differ betweeen two divisions.
Year 1
Year 2
Year 3
Year 4 year 5
Units produced
100,000
100,000
100,000
100,000
100,000
Units sold
80,000
90,000
110,000
100,000
115,000
Fixed manufacturing costs
$500,000
$500,000
$500,000
$500,000
500,000
Explanation / Answer
Income statement of EASTERN Division under Absorption Costing for each year:
b, COGM
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
=$15*(100000-80000)units
=$300,000
=$15*(20000+100000-90000)units
=$450,000
=$15*(30000+100000-110000)units
= $300,000
=$15*(20000+100000-100000)units
=$300,000
=$15*(20000+100000-115000)units
=$75000
Income statement of SOUTHERN Division under Variable Costing for each year:
b, COGM
=$10*100000 units
= $1,000,000
=$10*100000 units
= $1,000,000
=$10*100000 units
= $1,000,000
=$10*100000 units
= $1,000,000
=$10*100000 units
= $1,000,000
=$10*(100000-80000)units
=$200,000
=$10*(20000+100000-90000)units
=$300,000
=$10*(30000+100000-110000)units
= $200,000
=$10*(20000+100000-100000)units
=$200,000
=$10*(20000+100000-115000)units
=$50,000
Considering all other factors as same, below is the statement of difference in profits for each division
Difference in COGS
From the above we can see that in case of absorption costing the profits are higher in comparison to variable costing when the production is more than sales and vice versa. This is because the fixed expenses are not completely absorbed/charged to total costs and are taken as a part of closing stock, whereas in variable costing the closing stock is valued at only variable costs and the total fixed overheads forms part of the cost, irrespective of the level of production and sales thereof.
Particulars Year1 Year2 Year3 Year4 Year5 COGS:= a+b-c =$1,200,000 =$1,350,000 =$1,650,000 =$1,500,000 =$1,725,000 a. Opening stock 0 $300,000 $450,000 $300,000 $300,000b, COGM
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
$15*100000 units
= $1,500,000
c. Closing stock=$15*(100000-80000)units
=$300,000
=$15*(20000+100000-90000)units
=$450,000
=$15*(30000+100000-110000)units
= $300,000
=$15*(20000+100000-100000)units
=$300,000
=$15*(20000+100000-115000)units
=$75000
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