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 (35,000 units)		$8,750,000.00
2	Production costs (42,500 units):
3	Direct materials	$4,250,000.00
4	Direct labor	2,125,000.00
5	Variable factory overhead	1,062,500.00
6	Fixed factory overhead	637,500.00	8,075,000.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,150,000.00
9	Fixed selling and administrative expenses	200,000.00	1,350,000.00

	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 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 . 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 hat is the reason for the difference in the amount of income from operations reported in (A) and (B)? Check all that apply. There is no difference; the income from operations reported in (A) and (B) is the same. Under absorption costing, when inventory increases, the income statement will have a higher income from operations than will the variable costing income statement. Under variable costing, the units that were produced but unsold include fixed factory overhead cost, which is not included in cost of goods sold. Under absorption costing, when inventory increases, the income statement will have a lower income from operations than will the variable costing income statement. Under variable costing, all of the fixed factory overhead cost is deducted in the period in which it is incurred, regardless of the amount of inventory change.

Answer 1

Marginal/ Variable Costing:

Let's calculate the Cost of production per unit first:

Also, Inventory Statement will look like below:

Let's prepare the Income statement using Variable costing approach:

Absorption Costing Approach:

Cost of production per unit will be different from cost computed under Marginal costing since under Absorption costing, fixed factory overheads are absorbed by the number of units producted during that period:

Inventory Statement will remain same as we computed in Marginal Costing approach.

Income Statement will look like below under Absorption costing approach:

Difference between Income under both the methods:

Income difference of $112,500 ($750,000 - $637,500) is appearing due to allocation of fixed overhead in Closing stock under Absorption apporach. It should be noted that Closing stock of 7,500 units under Absorption approach is inclusive of $15 of ovehead allocated to each unit which in turn increases the overall income. While Under Marginal costing, Fixed overhead of factory is charged as period expense.

Hence Under Absorption costing,

If the inventory increases, income under absorption costing will be increased in comparision to Income computed under Marginal costing