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 about Jack Accounting head and Jack 1 day
plans on improving on accounting
procedures and bid strategy
Schedule series of meetings with the Jack Accounting department 3 days
accounting and management department. and Jack
-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.