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 Rent, office building 218,000 24,000 CPA fees 20,000 Other direct labor 265,700 Administrative salaries 114,000 Supervisory salaries Pipe 70,000 1,401,340 Tires and fuel 418,600 Depreciation, cquipment 198,000 Salaries of mechanics 50,000 Advertising Total expenses Operating income 15,000 2,818,640 $ 184.360
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.
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).
2. Assume that a significant driver is equipment hours. Identify the expenses that would likely be traced to jobs using this driver. Explain why you feel these costs are traceable using
equipment hours. What is the cost per equipment hour for these traceable costs?
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