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$).$

These are all correct

Utilities $-$ Production cost $($OH$)$

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 $-$ roduction 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. $13\mathrm{.}3$ is not correct $-53\mathrm{.}75$ is not correct $48\mathrm{.}56$ is not correct either. The feedback area says there are $6$ traceable costs

Feedback Area

Feedback

$1.$ Product Costs:

Direct materials can be traced to the product and are part of the product. Direct labor can be traced to the product and directly involved with the product. Indirect materials and indirect labor are part of overhead and though involved in the production process are not directly input to the product. Costs not directly traceable to the product but involved in manufacturing go into overhead.

Period Costs:

Period costs are other costs necessary in operations of the company, but not directly related to production, thus not carried as an inventory cost. Selling costs are directed at revenue and administrative are the general operating and salaries.

$2.$ Consider the costs and relationship to equipment hours.

$3.$ Consider what the driver is for the costs.

$4.$ Add six costs for traceable costs using equipment hours. Divide this by equipment hours $(18,200).$