Question

Frigid Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1, 2016, and operated at 100% of capacity during the first month. The following data summarize the results for July:

1	Sales (38,000 units)		$9,500,000.00
2	Production costs (44,500 units):
3	Direct materials	$3,560,000.00
4	Direct labor	2,002,500.00
5	Variable factory overhead	1,112,500.00
6	Fixed factory overhead	667,500.00	7,342,500.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,130,000.00
9	Fixed selling and administrative expenses	245,000.00	1,375,000.00

	Required:
A.	Prepare an income statement according to the absorption costing concept.*
B.	Prepare an income statement according to the variable costing concept. A colon (:) will automatically appear if it is required.*
C.	What is the reason for the difference in the amount of income from operations reported in (A) and (B)? * Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Enter all amounts as positive numbers. Please prepare in these formats: A. Prepare an income statement according to the absorption costing concept. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Enter all amounts as positive numbers. Frigid Motors Inc. Absorption Costing Income Statement 1 2 3 4 5 B. Prepare an income statement according to the variable costing concept. A colon (:) will automatically appear if it is required. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Enter all amounts as positive numbers. Frigid Motors Inc. Variable Costing Income Statement 1 2 3 4 5 6 7 8 9

Labels
Fixed costs
For the Month Ended July 31, 2016
July 31, 2016
Amount Descriptions
Contribution margin
Contribution margin ratio
Cost of goods sold
Fixed factory overhead costs
Fixed selling and administrative expenses
Gross profit
Income from operations
Loss from operations
Manufacturing margin
Planned contribution margin
Sales
Sales mix
Selling and administrative expenses
Variable cost of goods sold
Variable selling and administrative expenses

Answer 1

Solution A:

Frigid Motor Inc.
Full Absorption income statement For the month ended July 31
Particulars	Amount
Sales	$9,500,000.00
Cost of Goods Sold (38000*$165)	$6,270,000.00
Gross Profit	$3,230,000.00
Variable Selling & Administrative Expenses	$1,130,000.00
Fixed Selling & Administrative Expenses	$245,000.00
Net Operating Income	$1,855,000.00

Solution B:

Frigid Motor Inc.
Variable Costing income statement For the month ended July 31
Particulars	Per unit	Amount
Sales	$250.00	$9,500,000.00
Variable Cost:
Direct material	$80.00	$3,040,000.00
Direct labor	$45.00	$1,710,000.00
Variable factory overhead	$25.00	$950,000.00
Variable selling and administrative expenses	$29.74	$1,130,000.00
Total Variable cost	$179.74	$6,830,000.00
Contribution Margin	$70.26	$2,670,000.00
Fixed Factory Overhead		$667,500.00
Fixed Selling & Administrative Expenses		$245,000.00
Net Income		$1,757,500.00

Solution C:

The reason for the difference in the amount of income from operations reported in (A) and (B) is fixed manufacturing overhead. Under variable costing all fixed manufacturing overhead charged to income statement considering it as period expense. However in absorption costing, fixed manufacturing overhead is part of manufacturing cost, therefore deferred in unsold inventory.

Reconciliation of Net Operating income under absorption costing & Variable Costing - July 31
Particulars	Amount
Net Operating Income - Variable Costing	$1,757,500.00
Add : Fixed manufacturing overhead deferred in inventory ($15*6500)	$97,500.00
Less: Fixed manufacturing overhead released in inventory	$0.00
Net Operating Income - Absorption Costing	$1,855,000.00