Gateway Construction Company is a family-operated business that was founded in 1950 by Samuel Gateway. In the beginning, the company consisted of Gateway and three employees laying gas, water, and sewage pipelines as subcontractors. Currently, the company employs 25 to 30 people; Jack Gateway, Samuel's son, directs it. The main line of business continues to be laying pipeline.

Most of Gateway's work comes from contracts with city and provincial agencies. All of the company's work is located in Manitoba. The company's 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 Gateway is constantly reviewing the prices that other companies bid for jobs; when a bid is lost, he makes every attempt to analyze the reasons for the differences between his bid and those of his competitors. He uses this in- formation to increase the competitiveness of future bids.

Jack has become convinced that Gateway's 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 began a careful review of 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 decided that he needed some help. One thing that really puzzled him was how to classify his own salary of $114,000. 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 labour, and overhead costs. The company never has significant work in process (most jobs are started and completed within a week).
2. Assume that a significant reason for costs to change 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?

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Gateway Construction Income Statement For the Year Ended December 31, 2015 Sales (18,200 equipment hours @ S165 per hour) Less expenses: Utilities $3,003,000 $ 24,000 218,000 24,000 20,000 265,700 Machine operators Rent, office building CPA fees Other direct labour Administrative salaries 114,000 70,000 1,401,340 Supervisory salaries Pipe Tires and fuel 418,600 198,000 Depreciation, equipment Salaries of mechanics 50,000 15,000 Advertising Total expenses 2,818,640 $ 184,360 Income before income taxes