(3) Case 2.54 Cost Classification, Income Statement Gateway Construction Company, rua by Jack Gateway, employs 2S to 30 people as subcontrat tors for laying gas, water, and sewage pipelines. Most of Gateway's work comes from contrac with city and state agencies in Nebraska. The company's sales volume averages $3 million, an profits vary between 0 and 10% of sales. Sales and profits have been sconewhat below averige for the pest 3 years due to a recession an intense compstition. Because of this competition, Jack coastantly reviens the prias that other com paties bid for jobs. When a bid is lost, he analyzes the reasons for the differences beween his bid anke that of his competitors and uses this information to increase the competitiveness of f iture bids. Jack believes that Gateway's current accounting system is deficient, Currently, all expense: are simply deducted from revenues to arrive at operating income. No effort is made to distin guish among the costs of laying pipe, obtaining contracts, and administering the company. Ye 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 prioed on the basis of equipment hours, with at aveage 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 geaeral administrative matters. i Reuir vu: 1. Chassify the costs in the income statement as (1) costs of laying pipe (prodtction costs), (2) costs of securing coatracts (selling costs), or (3) costs of general admeinistration. For production costs, identify direct materials, direct labor, and overhead costs. The conpany neser bus significant work in process (nast jobs are started and completed within a day). 2. Assume that a significant driver is equipmien hours. Ideatify the expenses that would likely be traced to jobs asing this driver. Explain why you feel these eosts are traceable using equipment hours. What is the cost per equipment hour for these traceable costs