Preheat oven to 350 F. Line 12 count muffin tin with paper cups. In medium bowl sift together flour, sugar, baking soda and salt. In mixer bowl, beat milk, oil, vanilla, coconut extract and egg. Add dry ingredients with water on top and mix well. Fold in coconut. Fill papers 1/2 full. Bake for 18 to 20 minutes or until toothpick comes out clean. Cool completely then frost.
Frosting: Mix all frosting ingredients in mixing bowl and mix until soft and fluffy. Frost each cupcake and top with coconut.