Case $2-63$ Cost Classification, Income Statement

Objective $123$

Gateway Construction Company, run by Jack Gateway, employs $25$ to $30$ people as subcontractors for laying gas, water, and sewage pipelines. Most of Gateway's work comes from contracts with city and state agencies in Nebraska. The company's sales volume averages $$3$ million, and profits vary between $0$ and $10\%$ of sales.

Sales and profits have been somewhat below average for the past $3$ years due to a recession and intense competition. Because of this competition, Jack constantly reviews the prices that other companies bid for jobs. When a bid is lost, he analyzes the reasons for the differences between his bid and that of his competitors and uses this information to increase the competitiveness of future bids.

Jack believes 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 looked more carefully at the income statement for the