Gateway Construction Company, run by Jack Gateway, employs 25 to 30 people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateways work comes from contracts with city and state agencies in Nebraska. The companys sales volume averages $3 million, and profits vary between 0 and 10 percent of sales. Sales and profits have been somewhat below average for the past three 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 Gateways 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 hisown $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?

Income Statement For the Year Ended December 31, 2009 Soles (18,200 equipment hours $165 per hou $3,003,000 24,000 218,000 24,000 20,000 265,700 114,000 70,000 1401,340 418,600 198,000 50,000 15.000 Mochine operalors Rent, office building CPA lees Other dect labor Administrative solarie Supervisory solories Tires and fue Solaries of mechonic 2,818,640 Tolal expene ncome belore income toxes