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)?

To prepare the income statement according to the absorption costing concept, we need to include both variable and fixed manufacturing costs in the cost of goods sold. Here's how you can calculate it:

A. Income Statement (Absorption Costing Concept):

1. Sales:
- Sales: 35,000 units x $250 per unit = $8,750,000

2. Cost of Goods Sold:
- Direct materials: $4,250,000
- Direct labor: $2,125,000
- Variable factory overhead: $1,062,500
- Fixed factory overhead: $637,500
Total production costs (42,500 units): $8,075,000

3. Gross Profit:
Sales - Cost of Goods Sold = $8,750,000 - $8,075,000 = $675,000

4. Selling and Administrative Expenses:
- Variable selling and administrative expenses: $1,150,000
- Fixed selling and administrative expenses: $200,000
Total Selling and Administrative Expenses: $1,350,000

5. Income from Operations:
Gross Profit - Selling and Administrative Expenses: $675,000 - $1,350,000 = -$675,000

B. Income Statement (Variable Costing Concept):

1. Sales:
- Same as above: $8,750,000

2. Variable Cost of Goods Sold:
- Direct materials: $4,250,000
- Direct labor: $2,125,000
- Variable factory overhead: $1,062,500
Total variable production costs (42,500 units): $7,437,500

3. Contribution Margin:
Sales - Variable Cost of Goods Sold: $8,750,000 - $7,437,500 = $1,312,500

4. Variable Selling and Administrative Expenses:
- Same as above: $1,150,000

5. Contribution Margin - Variable Selling and Administrative Expenses:
$1,312,500 - $1,150,000 = $162,500

C. The reason for the difference in income from operations reported in (A) and (B) is due to the treatment of fixed manufacturing costs. In absorption costing, fixed manufacturing costs are included in the cost of goods sold, whereas in variable costing, they are treated as period costs and not included in the cost of goods sold. This leads to differences in profit reporting because fixed manufacturing costs can vary based on production levels, impacting the absorption costing income statement.