A Case Study on Gateway

Construction Company
In partial fulfillment of requirements in
Management Accounting
(ACC535M)

Submitted by:
Exiomo, Maryanne D. [11186542]
Lizardo, Regina Lour [11595213]
Santiago, Chamuel Michael Joseph A. [11595833]
Santos, Maria Creselda B. [11573015]
GROUP 4

Submitted to:
Arnel Onesimo O. Uy, PhD, CMA, CFC, CPA

Synthesis
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.
Jack wants to increase the competitiveness of his company when it comes to
bidding projects. He believes that the companys current accounting system is
deficient. The companys expenses are not classified and are simply deducted to
their revenue to determine the operating income. The majority of the companys
expenses comes from equipment use. Furthermore, he is having difficulty classifying
his own salary because he is performing two different roles in his company.
Statement of the Problem/s
- How should Jack assign and categorize the costs of operating his
business?
- How can Jack increase the competitiveness of his company?
Point of View
We are taking the point of view of Jack Gateway as he is the owner and manager of
the company.

Statement of the 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.
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
Companys competitiveness in acquiring projects.

Areas of Consideration

Cost is the amount of cash or cash equivalent sacrificed for goods and/or services
that are expected to bring a current or future benefit to the organization.
Costs are usually classified as follows:
Product Costs Vs. Period Costs
Product costs are costs assigned to the manufacture of products and recognized for
financial reporting when sold. They include direct materials, direct labor, factory
wages, factory depreciation, etc.
Period costs are on the other hand are all costs other than product costs. They
include marketing costs and administrative costs.
Breakup of Product Costs
The product costs are further classified into:

 Direct materials: Represents the cost of the materials that can be

identified directly with the product at reasonable cost.
Direct labor: Represents the cost of the labor time spent on that
product.
Manufacturing overhead: Represents all production costs except
those for direct labor and direct materials, for example the cost of an
accountant's time in an organization, depreciation on equipment, electricity,
fuel, etc.
The product costs that can be specifically identified with each unit of a product are
called direct product costs. Whereas those which cannot be traced to a specific unit
are indirect product costs. Thus direct material cost and direct labor cost are direct
product costs whereas manufacturing overhead cost is indirect product cost.
Prime Costs Vs. Conversion Costs
Prime costs are the sum of all direct costs such as direct materials, direct labor and
any other direct costs.
Conversion costs are all costs incurred to convert the raw materials to finished
products and they equal the sum of direct labor, other direct costs (other than
materials) and manufacturing
overheads.
Fixed Costs Vs. Variable
Costs
Fixed costs are costs which
remain constant within a certain
level of output or sales. This
certain limit where fixed costs
remain constant regardless of the
level of activity is called relevant
range. For example, depreciation
on fixed assets, etc.
Variable costs are costs which
change with a change in the level
of activity. Examples include
direct materials, direct labor, etc.

Alternative Courses of Action

ACA 1: Classify expenses either as product or period cost

Pros:
- This will tell how or why the money was spent in terms of producing
the product and be able to come up with sound budgeting and analyses
through comparison with period costs incurred outside manufacturing.
Cons:
- This classification requires accurate detail and improper classification
of expenses might make decisions more vulnerable to errors.

ACA 2: Classify expenses either as prime or conversion cost

Pros:
- The management will have insight on all costs related to
manufacturing activities. This will help managers pinpoint cost overruns and
come up with strategies to improve these costs.
Cons:
- Since this classification only focuses on production costs and
manufacturing overhead, other factors will be left out (i.e. advertising,
administrative costs).
ACA 3: Classify expenses either as fixed or variable cost
Pros:
- This classification will greatly impact in the decision making of the
management by tracking the expenses that will make planning, forecasting
and bidding as easy as possible. By comparing the fixed cost versus variable
cost, managers will be able to project how much pipes they need to
sell/produce to earn a profit.
Cons:
- Classifying expenses through fixed or variable cost can cause
managements budgeting decision depend on the figures of the variable cost
resulting to oversupply in inventories in case demands fall short due to some
unforeseen instances (i.e. economic slowdown, change in customers
demands).

Recommendation

The groups recommendation is that Jack should classify the expenses as

product and period costs (ACA 1). If he would start properly classifying his operating
expenses, he would be able to see how much he spends on every income statement
line item in relation his sales (e.g. 87.3% of sales is production costs).
The group suggests that Jack should develop a winning bid strategy. First, he
should know their bid-hit ratio. This will give him meaningful insight into his
companys success in the bidding process. Tracking their bid-hit ratio can reveal
where they should focus their bidding efforts in the future-and the projects to avoid
- so they can optimize their bid strategy.
Second, they should clearly understand each project true cost in order to
improve both bid-hit ratio and profitability. They should get project estimates as
close to the final job costs as possibly by looking at current data and related
details. Furthermore, Jack can try sourcing his construction materials to other
suppliers who can offer lower price yet same value or even better. As we can see in
the income statement above, 46.67% of Jacks sales is already allocated to the Pipe
product cost.
Third, Jack should meet face to face with the estimator since there is no
substitute for personal interaction when cultivating a business relationship. Having
a discussion with the potential client also allows him to know details that are not

available in the bid documents such as the top criteria for evaluation of bids, most
important aspect of the job and qualities that would make a bidder stand out.
Fourth, he should differentiate what his company can offer and makes it best
qualified for the job. He should highlight unique areas of expertise of his company
by adding some extras to their bid such as project pictures with descriptions,
customer quotes highlighting unique areas of Gateways expertise, special
certifications and list of awards if any.
Fifth, he should also be able to build bids quickly, accurately, and confidently.
To achieve this, he can purchase and use modern estimating software. It will allow
him to do estimates more accurately and faster by allowing him to take off directly
from electronic plans, improve analysis by activity or phases, standardize
estimating practices and it usually has a built-in error detection.
The group also recommends for Jack to increase on his advertising expenses
to improve his competitive advantage. If he uses a good marketing and advertising
strategy, possible customers will be able to know his products and services. He may
also promote his team, companys experience in the field and expertise that the
company has to offer.

Assuming that a significant driver is equipment hours, the expense that

would likely be traced to jobs using this driver would be the machine operator
wages. Since the operator is the one in-charge of the machine, it is directly
associated with the number of equipment hours that has been incurred in the
construction. The cost per equipment hour for machine operator would be
$ 218,000 = $ 11.98 machine operator wage per equipment hour
18,200 hours
Another expense that would likely be traced to job using equipment hours
would be the supervisory salaries. The more equipment hours incurred in the
production, the more the supervisor needs to monitor the performance of the
employees and over-all construction work-in-progress. The cost per equipment hour
for mechanic salaries and supervisory salaries would be the following:
$ 70,000 = $ 3.85 supervisory salary per equipment hour
18,200 hours
Also, we can also add other direct labor as expenses to be traced using
equipment hours. Since the nature of Jacks business is construction company,
information provided as to how many working hours these laborers incurred was not

given. Therefore, we can use equipment hours as the next cost driver related to the
other direct labor wages. The cost per equipment hour for other direct labor would
be
$ 265,700 = $ 14.60 other direct labor per equipment hour
18,200 hours
Pipe, tires and fuel can also be traced using equipment hours. The more
number of pipes used would result to the equipment to be utilized. As for tires and
fuels being a component of the equipment, the use of these translates to further
use of equipment as well. The cost per equipment hour for pipes, tires and fuel
would be
$ 1,401,300 = $ 76.99 pipe per equipment hours
18,200 hours
$ 418,600 = $23 tires and fuel per equipment hour
18,200 hours
Lastly, we can also trace equipment depreciation to equipment hours. The
nature of the business can identify the method to be used to depreciate the asset.
Aside from depreciating it using the number of useful life in years of the asset,
another way is depreciating it using the number of life hours incurred. The cost per
equipment hours related to its depreciation for the year would be
$ 198,000 = $ 10.88 depreciation expense per equipment hours
18,200 hours

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

Implementation Plan
Steps

Person in
Charge

People Involved

Timeline

Set a meeting with accounting

head about plans on
improving on accounting
procedures and bid strategy

Jack

Accounting head
and Jack

1 day

Schedule series of meetings

with the accounting and
management department.
-Identify process
improvements that must be
considered.

Jack

Accounting
department and
Jack

3 days

Review the process and

identify implementation date

Accounting
head

Accounting head
and Jack

1 day

Purchase estimating software

Training Stage
-Train those who needs to be
familiarized with the improved
accounting and bidding
procedures

Accounting
head

Accounting
1 day
Department and
Other Business Unit
Heads

Implementation Stage

Accounting
head

Accounting
Department

Continuou
s

Learning Points

Properly classifying the nature of expenses helps the owner to monitor how much
money has been allocated to the different categories of expenses. By using
percentage of sales, it is easier to analyze the data (e.g. 87.3% of sales is
production costs).
Furthermore, a company can increase its competitiveness through the following :
offering a product at a lower cost for a better value
delivering the service faster
outsourcing materials for a low cost yet providing a good quality
material that will last long
developing your brand through spending money on advertising (e.g.
utilizing social media by putting up a website, investing on videos and photos
of works made)
hiring competent professionals to analyze and supply informations that
can help managers in the decision making process
These are just some things a company can do that may result to a competitive edge
in the business market.

References
Mowen, M. M., Hansen, D. R., & Heitger, D. L. (2014). Cornerstones of Managerial
Accounting (5 ed.). Mason, OH: South-Western Cengage Learning.
SAGE. (2016, May). Improve your bid-hit ratio: Top five essentials of a winning bid
strategy. Retrieved from SAGE: https://www.sage.com/na/~/media/sage-jobready/assets/improve-bid-hit-ratio