Humpback Incorporated is a manufacturer of water bottles located in Auckland. The company was established by Aloysius Muthu in 2002, with a workforce of ten, to meet the needs of the adventure-hiking community. Its product range then was limited, but the company had an excellent reputation for quality.

Nowadays, Humpback manufactures an extensive range of high-quality steel and plastic water bottles. The company is managed by Aloysius son, Kasper, and employs 20 people. It has annual sales averaging approximately $1 million. Although it has been consistently profitable, Humpback has experienced increasing pressure from competitors since the early 2010s. The company uses a cost-plus approach to pricing but is having to constantly reduce its mark-up to maintain market share.

Both Aloysius and Kasper are qualified as engineers and have practically no knowledge of accounting. The business is small and has never been able to employ an accountant. Instead, a bookkeeper calculates monthly profit as sales revenue minus expenses. Prices are based on rough estimates of cost of direct material and direct labour inputs plus a 50 percent markup.

With the decline in profit and constant pressure on prices, Kasper began to feel uneasy about the way costs and profits were calculated. The results for the year just ended were:

Sales Less Expenses:

Materials purchased Factory wages production line Production supervisors salary Rent for premises Council rates for premises Sales staff Advertising Equipment depreciation Electricity Owner/managers salary Truck lease

Total expenses Net profit

$980,000

300,000 250,000 35,000 80,000 5,000 110,000 18,000 25,000 12,000 80,000 10,000

925,000 $55,000