, PLEASE USE THIS DOCUMENT AS A GUIDE TO ANSWER YOUR ASSIGNMENT
PART A
A) Critically evaluate the actual income statement prepared by APM’s management accountant
for the year ended 31 July 2025. In your critical evaluation, you must:
• Indicate whether and provide a reason why you agree/disagree with each amount;
• Review all the information/workings for errors and/ or omissions, and where applicable,
provide correct workings.
Introduction
Below is a line-by-line critique of APM’s actual income statement for the year ended 31 July 2025.
Sizanani uses direct (variable) costing and FIFO, so fixed manufacturing overhead (FMO) is a period
cost and must not be included in cost of sales; only variable manufacturing costs for units sold
should be expensed.
1) Sales — Agree (correct)
Units sold: 10 000 gearboxes @ R4 500 = R45 000 000; 32 000 couplings @ R1 200 = R38
400 000.
Total Sales = R83 400 000.
Note: The statement is titled “Budgeted” but contains actuals; the heading should read “Actual
Income Statement.”
2) Cost of sales shown as Direct Material, Direct Labour, VMO and FMO — Disagree (format
+ amounts)
Why
Under direct costing, cost of sales must include only variable manufacturing costs for units sold
(DM + DL + VMO).
The statement:
uses units produced (12 000 gearboxes; 36 000 couplings) instead of units sold, and
includes FMO in cost of sales, which is incorrect for a direct-costing system.
What’s missing
Closing finished goods inventory (because production > sales) is not recognised. Ending
inventory (variable cost only) =
Gearboxes: 2 000 × R1 707 = R3 414 000
Couplings: 4 000 × R 522 = R2 088 000
Total = R5 502 000 held in inventory, not expensed.
PART A
A) Critically evaluate the actual income statement prepared by APM’s management accountant
for the year ended 31 July 2025. In your critical evaluation, you must:
• Indicate whether and provide a reason why you agree/disagree with each amount;
• Review all the information/workings for errors and/ or omissions, and where applicable,
provide correct workings.
Introduction
Below is a line-by-line critique of APM’s actual income statement for the year ended 31 July 2025.
Sizanani uses direct (variable) costing and FIFO, so fixed manufacturing overhead (FMO) is a period
cost and must not be included in cost of sales; only variable manufacturing costs for units sold
should be expensed.
1) Sales — Agree (correct)
Units sold: 10 000 gearboxes @ R4 500 = R45 000 000; 32 000 couplings @ R1 200 = R38
400 000.
Total Sales = R83 400 000.
Note: The statement is titled “Budgeted” but contains actuals; the heading should read “Actual
Income Statement.”
2) Cost of sales shown as Direct Material, Direct Labour, VMO and FMO — Disagree (format
+ amounts)
Why
Under direct costing, cost of sales must include only variable manufacturing costs for units sold
(DM + DL + VMO).
The statement:
uses units produced (12 000 gearboxes; 36 000 couplings) instead of units sold, and
includes FMO in cost of sales, which is incorrect for a direct-costing system.
What’s missing
Closing finished goods inventory (because production > sales) is not recognised. Ending
inventory (variable cost only) =
Gearboxes: 2 000 × R1 707 = R3 414 000
Couplings: 4 000 × R 522 = R2 088 000
Total = R5 502 000 held in inventory, not expensed.
