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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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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.

Chapter 2, Problem 62C, Cost Classification, Income Statement Gateway Construction Company, run by Jack Gateway, employs 25

Required:

  1. 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. 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?

1.

To determine

Classify the costs of the income statements into production costs, selling costs and general administration costs.

Explanation

Income Statement:

The statement that shows revenue and expenses incurred over a period of time (usually one year) is called an income statement. It is used for external financial reporting as it helps the outsiders and investors in evaluating the firm’s financial health.

The following table represents the classification of the costs of the income statement:

CostsProduction Costs

Selling

Costs

($)

General Administration Costs ($)

Direct

Material

($)

Direct labor

($)

Overheads ($)  
Utilities    24,000
Machine operators 218,000   
Rent, office building   

2.

To determine

Identify the expenses that can be traced to jobs. Also, describe the reason that the expenses can be traced using equipment hours. Calculate the cost per equipment hour.

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