Question: You are helping a friend Jonah set up a new

You are helping a friend, Jonah, set up a new accounting system for a small start-up construction company. He specializes in custom, energy efficient homes that are built on a cost-plus basis. Cost-plus means that his customers pay a fixed percentage above the sum of direct and overhead costs.
As he goes through the accounts, Jonah asks why you set up a separate account for scrap. He does not believe that scrap should be recorded anywhere in his accounting system because it is worth little, and theft is no problem. He makes weekly trips to a recycling plant where he receives a small sum for the scrap. Most of the time Jonah is working on only one house and the scrap is only for that house. However, once in a while he is working on several houses, and the scrap for all of the houses is recycled at once.

A. Explain the two ways that scrap can be recorded in a job costing system.
B. Choose the appropriate method for Jonah and explain your choice.
C. Suppose you are a prospective homeowner. Explain to Jonah why you believe the revenue from scrap associated with your home should be recorded as a reduction in your costs rather than his overall costs.
D. Write a brief (and diplomatic) paragraph to convince Jonah that he needs to account for the revenues from scrap.

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  • CreatedJanuary 26, 2015
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