Sutton Construction Inc. is a privately held, family-founded corporation that builds single- and multiple-unit housing. Most projects Sutton Construction undertakes involve the construction of multiple units. Sutton Construction has adopted a job-order costing system for determining the cost of each unit. The costing system is fully computerized. Each project’s costs are divided into the following five categories:
1. General conditions, including construction site utilities, project insurance permits and licenses, architect’s fees, decorating, field office salaries, and cleanup costs.
2. Hard costs, such as subcontractors, direct materials, and direct labor.
3. Finance costs, including title and recording fees, inspection fees, and taxes and discounts on mortgages.
4. Land costs, which refer to the purchase price of the construction site.
5. Marketing costs, such as advertising, sales commissions, and appraisal fees.
Recently, Sutton Construction purchased land for the purpose of developing 20 new single- family houses. The cost of the land was $250,000. Lot sizes vary from ¼ to ½ acre. The 20 lots occupy a total of eight acres.
General conditions costs for the project totaled $120,000. This $120,000 is common to all 20 units that were constructed on the building site.
Job3, the third house built in the project, occupied a ¼-acre lot and had the following hard costs:
Direct materials .....$ 8,000
Direct labor...... 6,000
Subcontractor ..... 14,000
For Job 3, finance costs totaled $4,765 and marketing costs, $800. General conditions costs are allocated on the basis of units produced. Each unit’s selling price is determined by adding 40 percent to the total of all costs.
Required:
1. Identify all production costs that are directly traceable to Job 3. Are all remaining production costs equivalent to overhead found in a manufacturing firm? Are there nonproduction costs that are directly traceable to the housing unit? Which ones?
2. Develop a job-order cost sheet for Job 3. What is the cost of building this house? Did you include finance and marketing costs in computing the unit cost? Why or why not? How did you determine the cost of land for Job 3?
3. Which of the five cost categories corresponds to overhead? Do you agree with the way in which this cost is allocated to individual housing units? Can you suggest a different allocation method?
4. Calculate the selling price of Job 3. Calculate the profit made on the sale of this unit.