Bowen Bridge Company constructs bridges for the State of Kentucky. During 2018, Bowen started work on three bridges. The cost of materials and labor for each bridge follows:
Special Orders Materials Labor
Bridge 305 ......................$407,200........... $352,700
Bridge 306........................ 362,300............ 375,000
Bridge 307........................801,700............ 922,800
The predetermined overhead rate is $1.20 per direct labor dollar. Actual overhead costs were $2,170,800. Bridge 306 was completed for a contract price of $1,357,000 and was turned over to the state. Construction on Bridge 305 was also completed but the state had not yet finished its inspection process. General selling and administrative expenses amounted to $210,000. Over- or under applied overhead is closed directly to the Cost of Goods Sold account. The company recognizes revenue when it turns over a completed bridge to a customer.
Required
a. Divide the class into groups of four or five students each and organize the groups into three sections. Assign Task 1 to the first section of groups, Task 2 to the second section, and Task 3 to the third section.
Group Tasks
(1) Determine the cost of construction for Bridge 305.
(2) Determine the cost of construction for Bridge 306.
(3) Determine the cost of construction for Bridge 307.
b. Select a spokesperson from each section. Use input from the three spokespersons to prepare an income statement and the asset section of the balance sheet.
c. Does the net income accurately reflect the profitability associated with Bridge 306? Explain.
d. Would converting to a process costing system improve the accuracy of the amount of reported net income? Explain.