Gateway Construction Company

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A Case Analysis entitled

Case 2: Gateway Construction Company

Submitted to the

Ramon V. Del Rosario College of Business

De La Salle University – Manila

 In partial fulfillment

Of the course requirements in

ACC535M Management Accounting

Saturday, 9:00 am – 12:00 noon

Term 3, AY 2016 – 2017

June 3, 2017

Submitted by:

Group 3

Angeli Ronica Buenviaje

Evan Christopher Cotiangco

Jiezel Masajo

Valerie Jane Osuna

Submitted to:

Dr. Jose Lauro B. Cruz

Table of Contents

I.        Synthesis

II.        Point of View

III.        Statement of the Problem

IV.        Statement of Objectives

V.        Areas of Consideration

VI.      Case Questions

VII.        Alternative Courses of Action

VIII.        Recommendation

IX.        Implementation Plan

X.        References

SYNTHESIS

        Gateway Construction Corporation is engaged in the business of subcontracting serves for laying gas, sewage and water pipelines. The company employs 25 to 30 people. Its contracts comes mostly from the city and state agencies in Nebraska. The company only averages a profit of  0 to 10% from its sales. In order to stay competitive Jack reviews bids coming from their competitors, and uses the information he was able to gain from his analysis of the differences of their bids and his competition’s basis for their computation.

        Jack believes that Gateway’s current accounting system is deficient. No effort is made to distinguish between costs, and all bids are based on the cost of laying pipe.

POINT OF VIEW

        The case takes the point of view of Jack Gateway who runs Gateway Construction Corporation.

STATEMENT OF THE PROBLEM

How should Gateway Construction set the prices of its services to increase profitability of the company?

STATEMENT OF OBJECTIVES

        Jack’s main objective is to correct the deficient accounting reporting system being used by the company in order to be able to set competitive prices for its services. In particular, Jack should:

• Compute for the total traceable equipment costs;
• Identify the cost classification of each expense; and
• Identify better costing strategy to competitively price the company’s services.

AREAS OF CONSIDERATION

            In order to address the identified problem and meet the objectives, the following management and accounting principles must be considered:

Activity Based Costing (ABC)

This method assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.

CASE QUESTIONS

1. Classify the costs in the income statement as (1) costs of laying the pipe (production costs), (2) costs of securing contracts (selling costs), (3) costs of general administration. For production costs, identify direct materials, direct labor, and overhead costs. The company never has significant work in process (most jobs are completed within a day).

Analysing and re-classifying the expenses incurred by Gateway Construction Corporation, the Income Statement below is prepared to better reflect the total cost of sales and operating expenses incurred by the company, and its gross and net profit.