Jackson'sDog Food Ltd manufacturers an extensive range of high-quality food for dogs. The company is managed by Jason Jackson and employs 15 people. It has annual sales averaging approximately $10 million. Although it has been consistently profitable,Jackson'sDog Food Ltd has experienced increasing pressure from competitors in recent years. The company uses a cost-plus approach to pricing but is having to reduce its mark-up constantly to maintain market share.

Jason's background is in engineering. The business has never employed an accountant. Instead, a bookkeeper calculates monthly profit as sales revenue minus expenses. Prices are based on rough estimates of the cost of direct material and direct labour inputs plus a 50% mark-up.

With the decline in profit and constant pressure on prices, Jason began to feel uneasy about the way costs and profits were calculated. The results for the month ending 29 February 2024 were:

Jackson's Dog Food Ltd Profit for the month ending February 2024

Sales 980,000 Less Expenses:

Materials purchased 300,000 Factory wages-production line 250,000

Production line supervisor's salary 35,000

Premises 80,000 Council rates 5,000 Sales and admin staff salaries 110,000

Advertising 18,000 Equipment depreciation (incl. the Truck) 25,000

Electricity 48,000 Manager's Salary (Jason) 80,000 Truck lease 10,000 961,000

Net profit 19,000

Additional information:

The inventory levels for the month:

oRaw materials, 1 February 25,000

oRaw materials, 29 February 30,000 oWorkinProcess, 1 February 100,000

oWorkinProcess, 29 February 140,000

oFinishedGoods, 1 February 47,500

oFinishedGoods, 29 February 75,000

The factory occupies 80% of the premises, the sales area occupies 15%

and administration 5%.

Most of the equipment is used for manufacturing, with only 5% of the book value

being used for sales and administrative functions.

Almost all the electricity is consumed in the factory.

The truck is used to deliver finished goods to customers.

Jason spends about half of his time on factory management, the rest of his time in the

sales area and on administration.

Required:Show ALL your workings.

(i) Comment on the cost classifications currently being used inJackson'sDogFood Ltd's profit statement.

(v) Explain what constitutes the difference between the income statement you prepared in part (iv) and the profit statement prepared by the company'sbookkeeper.

(vi) Evaluate the usefulness of product costs based on direct materials and direct labour