Question

Cost Classification, Income Statement

Gateway Construction Company, run by Jack Gateway, employs 25 to 30 people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateway's work comes from contracts with city and state agencies in Nebraska. The company's sales volume averages $3 million, and profits vary between 0 and 10% of sales.

Sales and profits have been somewhat below average for the past 3 years due to a recession and intense competition. Because of this competition, Jack constantly reviews the prices that other companies bid for jobs. When a bid is lost, he analyzes the reasons for the differences between his bid and that of his competitors and uses this information to increase the competitiveness of future bids.

Jack believes that Gateway's current accounting system is deficient. Currently, all expenses are simply deducted from revenues to arrive at operating income. No effort is made to distinguish among the costs of laying pipe, obtaining contracts, and administering the company. Yet all bids are based on the costs of laying pipe.

With these thoughts in mind, Jack looked more carefully at the income statement for the previous year (see below). First, he noted that jobs were priced on the basis of equipment hours, with an average price of $165 per equipment hour. However, when it came to classifying and assigning costs, he needed some help. One thing that really puzzled him was how to classify his own $114,000 salary. About half of his time was spent in bidding and securing contracts, and the other half was spent in general administrative matters.

Gateway Construction Company Income Statement For the Year Ended December 31, 2017
Sales (18,200 equipment hours @ $165 per hour)				$3,003,000
Less expenses:
Utilities		$ 24,000
Machine operators		218,000
Rent, office building		24,000
CPA fees		20,000
Other direct labor		265,700
Administrative salaries		114,000
Supervisory salaries		70,000
Pipe		1,401,340
Tires and fuel		418,600
Depreciation, equipment		198,000
Salaries of mechanics		50,000
Advertising		15,000
Total expenses				2,818,640
Operating income				$ 184,360

Required:

1. Classify the costs in the income statement as (1) costs of laying pipe (production costs), (2) costs of securing contracts (selling costs), or (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are started and completed within a day).

Utilities	Administrative cost
Machine operators	Production cost (DL)
Rent, office building	Administrative cost
CPA fees	Administrative cost
Other direct labor	Production cost (DL)
Administrative salaries	Administrative cost
Supervisory salaries	Production cost (OH)
Pipe	Production cost (DM)
Tires and fuel	Production cost (OH)
Depreciation, equipment	Production cost (OH)
Salaries of mechanics	Production cost (OH)
Advertising	Selling cost

2. What is the cost per equipment hour for these traceable costs? Round your answer to the nearest cent.
$ per hour

Answer 1

Ans.1 Gatetsa come Stcte mment for the yeaur ended Desembeu 8L, 0la Amount CS)| Amount Sales Cts,200 equipment howu 165, pen koua 3,003,600 LessExpenses of Produchion 2,621,640 CProduch on Costs aying pipe 1,40L, 340 ㄏ-Direct Labou Machine 0penctors 218,000 > 011 euhead costs Supesnvfsory Salasie Tires and fuel Depreciehon et equint s, 000 チ0 .000 し65,600 | Salaruies of mechanics S0,000 Eactory /Prod elated in) 91,36 Prpfit CGuross

Amount C) Amount (k) Less Ad ministrative Custs 125, 000 Utilette Rent Office Buildin C.PA fees 24,000 24,000 20,000 Administrabue Salauie 50%-of- Jack's salasıy Bross Profit 256,3 ー1 es s-,-一SellingーCosts Adveutisin 15,000 一Sales related . Sala ies (50% of Jack's Salary Net opesating praf it

Ap cotS pest Uni Total res peehue Co t Total Eqirment housus Costpest equup men+ houa CA) 芏チ.00 Machine Opesahors CL 26 S% Supessuisor scul all Depresiabion equipment LO -, 88 - L40. equtpment hol 1.32 1.32 Rent, office Building CPA fees Administrve Salasue 3.13

Total Adminlstratsve cost pesu Equipment hous sales related Salasues 0 82 3 13 3.95 pesu equipment hou 1467 houn