THE BMZ ACADEMY
053 8213
BMZ ACADEMY 061 262 1185/068 053 8213Page 1 of 23
, THE BMZ ACADEMY
(A - a) Critical Evaluation of the Actual Income Statement
The presented income statement exhibits several material errors and omissions in
both its calculation and presentation. The statement misapplies costing principles,
resulting in inaccurate figures for Cost of Sales, Gross Profit, and ultimately Net Profit.
Although a direct costing system is specified, the income statement incorrectly
includes Fixed Manufacturing Overhead (FMO) in the product cost, which contradicts
the principles of direct costing. The following provides a detailed, itemised review of
the errors and inconsistencies identified:
1. Sales Revenue (R83 400 000)
AGREE. The calculation is correct.
o Gearboxes: 10 000 units x R4 500 = R45 000 000
o Couplings: 32 000 units x R1 200 = R38 400 000
o Total: R45 000 000 + R38 400 000 = R83 400 000
2. Cost of Sales (R48 120 000)
DISAGREE. The entire amount is incorrect because it is calculated based on the cost
of production, not the cost of sales. The statement uses the cost of producing 12
000 gearboxes and 36 000 couplings to calculate the cost of goods for the 10 000
gearboxes and 32 000 couplings that were sold. Furthermore, it incorrectly includes
Fixed Manufacturing Overhead (FMO) under a direct costing system.
Under a direct costing system, only variable costs (Direct Material, Direct Labour,
Variable Manufacturing Overhead) are included in the product cost. FMO is a period
cost. The cost of sales should be based on the number of units sold, not produced.
Calculation of Standard Variable Cost Per Unit:
Gearbox Cost per Coupling
Inputs Cost Cost per Coupling
Calculation Gearbox Calculation
Direct Material
R 15 000 per (24kg/1000) X (6kg/1000) X R15
High-grade steel R 360.00 R 90.00
ton R15 000 000
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, THE BMZ ACADEMY
Gearbox Cost per Coupling
Inputs Cost Cost per Coupling
Calculation Gearbox Calculation
Aluminium R 44 per kg 8 kg X R44 R 352.00 2 kg X R44 R 88.00
R 50 per
Precision bearings 4 X R50 R 200.00 1 X R50 R 50.00
bearing
(2L / 1000) X R44 (0.5L / 1000) X
Lubricant R 44,000 per kl R 88.00 R 22.00
000 R44,000
Rubber Sealing R 900 per pack
(12/150) X R900 R 72.00 (2/150) X R900 R 12.00
rings of 150
Total Direct
R 1 072.00 R 262.00
Material
Direct Labour R 120 per hour (180/60) X R120 R 360.00 (75/60) X R120 R 150.00
R 220 per
VMO (75/60) X R220 R 275.00 (30/60) X R220 R 110.00
machine hour
Total Standard
R 1 707.00 R 522.00
Variable Cost
Calculation of Variable Cost of Sales:
Gearboxes: 10 000 units sold X R1,059 = R 10 590 000
Couplings: 32 000 units sold X R257 = R 8 224 000
Total Variable Cost of Sales: R10 590 000 + R8 224 000 = R18 814 000
Therefore, the Cost of Sales should be R18 814 000 (variable costs only), not R48
120 000.
3. Gross Profit (R35 280 000)
DISAGREE. This figure is a result of the incorrect Cost of Sales
The correct Gross Profit (often referred to as Contribution Margin in direct costing) is:
3|Page BMZ ACADEMY 061 262 1185/068 053 8213
053 8213
BMZ ACADEMY 061 262 1185/068 053 8213Page 1 of 23
, THE BMZ ACADEMY
(A - a) Critical Evaluation of the Actual Income Statement
The presented income statement exhibits several material errors and omissions in
both its calculation and presentation. The statement misapplies costing principles,
resulting in inaccurate figures for Cost of Sales, Gross Profit, and ultimately Net Profit.
Although a direct costing system is specified, the income statement incorrectly
includes Fixed Manufacturing Overhead (FMO) in the product cost, which contradicts
the principles of direct costing. The following provides a detailed, itemised review of
the errors and inconsistencies identified:
1. Sales Revenue (R83 400 000)
AGREE. The calculation is correct.
o Gearboxes: 10 000 units x R4 500 = R45 000 000
o Couplings: 32 000 units x R1 200 = R38 400 000
o Total: R45 000 000 + R38 400 000 = R83 400 000
2. Cost of Sales (R48 120 000)
DISAGREE. The entire amount is incorrect because it is calculated based on the cost
of production, not the cost of sales. The statement uses the cost of producing 12
000 gearboxes and 36 000 couplings to calculate the cost of goods for the 10 000
gearboxes and 32 000 couplings that were sold. Furthermore, it incorrectly includes
Fixed Manufacturing Overhead (FMO) under a direct costing system.
Under a direct costing system, only variable costs (Direct Material, Direct Labour,
Variable Manufacturing Overhead) are included in the product cost. FMO is a period
cost. The cost of sales should be based on the number of units sold, not produced.
Calculation of Standard Variable Cost Per Unit:
Gearbox Cost per Coupling
Inputs Cost Cost per Coupling
Calculation Gearbox Calculation
Direct Material
R 15 000 per (24kg/1000) X (6kg/1000) X R15
High-grade steel R 360.00 R 90.00
ton R15 000 000
2|Page BMZ ACADEMY 061 262 1185/068 053 8213
, THE BMZ ACADEMY
Gearbox Cost per Coupling
Inputs Cost Cost per Coupling
Calculation Gearbox Calculation
Aluminium R 44 per kg 8 kg X R44 R 352.00 2 kg X R44 R 88.00
R 50 per
Precision bearings 4 X R50 R 200.00 1 X R50 R 50.00
bearing
(2L / 1000) X R44 (0.5L / 1000) X
Lubricant R 44,000 per kl R 88.00 R 22.00
000 R44,000
Rubber Sealing R 900 per pack
(12/150) X R900 R 72.00 (2/150) X R900 R 12.00
rings of 150
Total Direct
R 1 072.00 R 262.00
Material
Direct Labour R 120 per hour (180/60) X R120 R 360.00 (75/60) X R120 R 150.00
R 220 per
VMO (75/60) X R220 R 275.00 (30/60) X R220 R 110.00
machine hour
Total Standard
R 1 707.00 R 522.00
Variable Cost
Calculation of Variable Cost of Sales:
Gearboxes: 10 000 units sold X R1,059 = R 10 590 000
Couplings: 32 000 units sold X R257 = R 8 224 000
Total Variable Cost of Sales: R10 590 000 + R8 224 000 = R18 814 000
Therefore, the Cost of Sales should be R18 814 000 (variable costs only), not R48
120 000.
3. Gross Profit (R35 280 000)
DISAGREE. This figure is a result of the incorrect Cost of Sales
The correct Gross Profit (often referred to as Contribution Margin in direct costing) is:
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