COST CLASSIFICATION

AND INCOME STATEMENT

Gateway Construction
Company

Presented by:
Queenie Marie O. Alas
 BACKGROUND OF THE STUDY
Gateway Construction Company, a
utility-pipe laying subcontractor for the city
and state agencies in Nebraska, has had sales
volume that averages $3 million, and profits
that vary between 0 and 10% of sales. Due to
a recession and intense competition, sales
and profits have been somewhat below
average for the past 3 years.
 ISSUES AND CONCERNS
The root cause of the problem in the
case study is that due to a recession and
intense competition, the sales and profits of
Gateway Construction Company have been
somewhat below average for the past 3
years.
 POINT OF VIEW
I am taking the point of view of Jack
Gateway as he is the owner and manager of
the company.
 STATEMENT OF THE PROBLEM
Two Main Problems:
1. How he should assign and categorize the
costs of operating his business.
2. How he can increase the competitiveness
of his company.
 OBJECTIVES
1. To 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.
 OBJECTIVES
2. To identify the expenses that would likely
be traced to jobs related to equipment
hours.
3. To determine a strategy that will improve
Gateway Construction Company’s
competitiveness in acquiring projects.
 AREAS OF CONSIDERATION
• Cost
• Product Costs VS Period Costs
• Break-up of Product Costs
o Direct Materials
o Direct Labor
o Manufacturing Overhead
 AREAS OF CONSIDERATION
• Prime Costs VS Conversion Costs
• Fixed Costs VS Variable Costs
AREAS OF CONSIDERATION
 ALTERNATIVE COURSES OF ACTION
ACA 1: Classify expenses either as product or period
cost
ACA 2: Classify expenses either as prime or conversion
cost
ACA 3: Classify expenses either as fixed or variable
cost
 RECOMMENDATION
1. Jack should classify the expenses as product and
period costs (ACA 1)
2. Jack should develop a winning bid strategy
3. They should clearly understand each project true
cost in order to improve both bid-hit ratio and
profitability.
 RECOMMENDATION
4. Jack should meet face to face with the estimator
since there is no substitute for personal interaction
when cultivating a business relationship.
5. He should differentiate what his company can offer
and makes it best qualified for the job.
6. He should also be able to build bids quickly,
accurately, and confidently
 RECOMMENDATION
7. He should increase on his advertising expenses to
improve his competitive advantage.
PLAN OF ACTION
 PLAN OF ACTION
Overall, the expense that would likely be traced to
jobs using equipment hours would be:
Machine operator wage $ 218,000
Supervisory Salary 70,000
Other Direct Labor 265,700
Pipe 1,401,300
Tires and fuel 418,600
Depreciation expense 198,000
Total 2,571,600
18,200 hours
$ 141.30
 PLAN OF ACTION
Implementation Plan
Steps Person in Charge People Involved Timeline

Set a meeting with accounting head Jack Accounting head and Jack 1 day
about plans on improving on accounting
procedures and bid strategy
Schedule series of meetings with the Jack Accounting department 3 days
accounting and management and Jack
department.
-Identify process improvements that
must be considered.
Review the process and identify Accounting head Accounting head and Jack 1 day
implementation date
Purchase estimating software Accounting head Accounting Department 1 day
Training Stage and Other Business Unit
-Train those who needs to be familiarized Heads
with the improved accounting and
bidding procedures
Implementation Stage Accounting head Accounting Department Continuous
RESEARCH ARTICLE
Cost Behaviour Classification
and Cost Behaviour Structures
of Manufacturing Companies
 INTRODUCTION
• This study investigates the cost behaviour
classification and cost behaviour structures of
manufacturing companies in the Vaal Triangle
• The problem investigated as part of this study
involves determining the way in which the degree
of technological development of manufacturing
companies in the Vaal Triangle affects cost structure
and operating risk.
 INTRODUCTION
• This paper will give accountants (and managers) in
the Vaal Triangle, a region with a declining
economy, an indication of how cost structures and
cost behaviour classification differ among
manufacturing companies in the sample
 METHOD
• Since the possibility of applying cost and
management accounting is limited in smaller
businesses, it was decided to focus only on larger
businesses.
• A total of 58 questionnaires were mailed to the
management accountant or financial manager of
these companies and after several phone calls, only
14 responded, resulting in a 24% response rate.
RESULTS AND DISCUSSION
RESULTS AND DISCUSSION
 CONCLUSION
• The study firstly revealed that the classification of
total costs as fixed or variable components differs
markedly for the companies in the sample (Table 2).
• No significant positive relationship was found to
exist between the fixed cost component of
companies and their degree of technological
development (Table 3)
 CONCLUSION
• The study found that the companies in the sample
indicated cost volume-profit analysis to be their
most important reason for classifying costs into
fixed and variable components.
• Different companies over the world classify the
same cost item differently.