Showing Page:
1/6
1
Case Study on Al-Salahi Construction Company
Submitted to:
Accountancy Department
De La Salle University Manila
In partial fulfillment
Of the course requirements in
Management Accounting
Submitted by:
Showing Page:
2/6
2
1. Synthesis
Nebraskan cities and state agencies are served by Jack Al- Salahi pipeline contractor, Al-Salahi
Construction Company. In a typical year, the company does $3 million in sales and makes
anything from 0% to 10% of that. Due to recession and fierce rivalry, sales and profitability have
been below normal for the past three years for the company. In order to make Al- Salahi 's future
bids more competitive, Jack examines the causes for the disparities between his offer and those
of his competitors on a regular basis. As a result, he discovered that their accounting system is
flawed, as it fails to distinguish between the costs of installing pipe, securing contracts, and
managing the business itself. When determining operating income, all of these expenditures are
simply removed from revenue, yet the prices for installing pipe vary widely.
Because of this, as Jack was looking through last year's financial statements, he recognized he
needed help classifying and allocating costs (see the chart below).
He also has trouble classifying his own income because he has two jobs at the organization.
Al- Salahi Construction Company
Income Statement
For the Year Ended December 31, 2013
Sales (18,200 equipment hours @ $165 per
hour) Less expenses:
$3,003,00
0
Utilities
$ 24,000
Machine operators
218,000
Rent, office building
24,000
CPA fees
20,000
Other direct labor
265,700
Showing Page:
3/6
3
Administrative salaries
114,000
Supervisory salaries
70,000
Pipe
1,401,340
Tires and fuel
418,600
Depreciation, equipment
198,000
Salaries of mechanics
50,000
Advertising
15,000
Total expenses
2,818,640
Operating income
$184,360
I. Statement of the Problem
To have a clearer picture of Gateway's overall operating expenditures, as general manager, how
should Jack describe the company's expenses in the income statement?
II. Point of View
The group will adopt the point of view of Jack Al- Salahi, the company's owner and manager.
Because he's the company's CEO, Jack needs to know how the company spends its money in
order to make sound business decisions. A more precise cost classification can also allow him to
develop more strategic, competitive bids since he is heavily involved in the bidding and contract-
securing process
III. Objectives
In the income statement, categorize costs according to whether they are production costs (such as
the cost of laying pipe) or selling costs (such as the cost of obtaining contracts).
To determine the costs that can be linked to equipment hours used for various jobs.
Showing Page:
4/6
4
In order to make the company more competitive in future bids, develop a plan.
V. Areas of Consideration
Framework and Decision Criteria
With the decision criteria and weights matrix in place, the optimal course of action will be
determined for this particular situation. We'll look at numerous cost scenarios to see which one
is the greatest fit for Al- Salahi Construction.
Costs of raw materials versus costs of conversion
In terms of total expenses, prime costs are made up of direct materials and direct labor,
whereas conversion costs are made up of direct labor and manufacturing overhead. It is
possible to think of conversion cost as the price of transforming raw materials into the end
product.
Decision criteria
Weight
Rationale
Prime Costs vs Conversion
Costs
I00%
This is use to compare the relative cost of
manufacturing inputs (e.g. direct materials
and direct labor versus processing (e.g.
direct labor and overhead)
Product costs vs Product Costs
Decision criteria
Weight
Rationale
Period Costs are assets that are carried in inventories until the goods are sold. Examples of period
costs are cost of office supplies, advertising, cost of CEO’s salary. Meanwhile, product costs are
costs, both direct and indirect, of producing a product in a manufacturing firm and preparing it for
sale. Product costs can be classified as direct materials, direct labor and manufacturing overhead.
Showing Page:
5/6
5
Period Costs vs Product
costs
I00%
In determining whether income-generating
items can be lucrative in the long run,
managers can use period costs and product
costs.
Variable Costs vs Fixed Costs
A rise in the total cost of variable expenses, while fixed costs remain constant within the relevant
range when the level of output rises or falls, increases the total cost of output (e.g rent, property
taxes)
Decision criteria
Weight
Rationale
Variable costs vs fixed costs
I00%
Quantitative estimates of cost per unit and
total costs at various output levels are
provided.
Revised income statement
Al- Salahi Construction Company Income Statement
For the Year Ended December 31, 2013
Sales revenues (18,200 equipment hours @ $165 per hour) 3,003,0
Production costs
00 100%
Direct material
Pipe
1,401,340
Direct labor
Machine operators
218,000
Other direct labor
265,700
Overhead
Supervisory salaries 70,000
Tires and fuel 418,600
Showing Page:
6/6
6
Depreciation equipment 198000
2,6
Salaries of mechanics
50,000
21,640
87.3%
Gross profit
381,360
12.7%
Less:
Selling expense
Sales salaries
57,000
Advertising
15,000
72,000
2.4%
Administrative expense
Utilities
24,000
Rent, office building
24,000
CPA fees
20,000
Administrative salaries
57,000
125,000
4.2%
Operating income
184,360
6.1%

Unformatted Attachment Preview

1 Case Study on Al-Salahi Construction Company Submitted to: Accountancy Department De La Salle University – Manila In partial fulfillment Of the course requirements in Management Accounting Submitted by: 2 1. Synthesis Nebraskan cities and state agencies are served by Jack Al- Salahi pipeline contractor, Al-Salahi Construction Company. In a typical year, the company does $3 million in sales and makes anything from 0% to 10% of that. Due to recession and fierce rivalry, sales and profitability have been below normal for the past three years for the company. In order to make Al- Salahi 's future bids more competitive, Jack examines the causes for the disparities between his offer and those of his competitors on a regular basis. As a result, he discovered that their accounting system is flawed, as it fails to distinguish between the costs of installing pipe, securing contracts, and managing the business itself. When determining operating income, all of these expenditures are simply removed from revenue, yet the prices for installing pipe vary widely. Because of this, as Jack was looking through last year's financial statements, he recognized he needed help classifying and allocating costs (see the chart below). He also has trouble classifying his own income because he has two jobs at the organization. Al- Salahi Construction Company Income Statement For the Year Ended December 31, 2013 Sales (18,200 equipment hours @ $165 per $3,003,00 hour) Less expenses: 0 Utilities Machine operators $ 24,000 218,000 Rent, office building 24,000 CPA fees 20,000 Other direct labor 265,700 3 Administrative salaries 114,000 Supervisory salaries Pipe 70,000 1,401,340 Tires and fuel 418,600 Depreciation, equipment 198,000 Salaries of mechanics 50,000 Advertising 15,000 Total expenses 2,818,640 Operating income $184,360 I. Statement of the Problem To have a clearer picture of Gateway's overall operating expenditures, as general manager, how should Jack describe the company's expenses in the income statement? II. Point of View The group will adopt the point of view of Jack Al- Salahi, the company's owner and manager. Because he's the company's CEO, Jack needs to know how the company spends its money in order to make sound business decisions. A more precise cost classification can also allow him to develop more strategic, competitive bids since he is heavily involved in the bidding and contractsecuring process III. Objectives In the income statement, categorize costs according to whether they are production costs (such as the cost of laying pipe) or selling costs (such as the cost of obtaining contracts). To determine the costs that can be linked to equipment hours used for various jobs. 4 In order to make the company more competitive in future bids, develop a plan. V. Areas of Consideration Framework and Decision Criteria With the decision criteria and weights matrix in place, the optimal course of action will be determined for this particular situation. We'll look at numerous cost scenarios to see which one is the greatest fit for Al- Salahi Construction. Costs of raw materials versus costs of conversion In terms of total expenses, prime costs are made up of direct materials and direct labor, whereas conversion costs are made up of direct labor and manufacturing overhead. It is possible to think of conversion cost as the price of transforming raw materials into the end product. Decision criteria Weight Rationale Prime Costs vs Conversion I00% This is use to compare the relative cost of Costs manufacturing inputs (e.g. direct materials and direct labor versus processing (e.g. direct labor and overhead) Product costs vs Product Costs Period Costs are assets that are carried in inventories until the goods are sold. Examples of period costs are cost of office supplies, advertising, cost of CEO’s salary. Meanwhile, product costs are costs, both direct and indirect, of producing a product in a manufacturing firm and preparing it for sale. Product costs can be classified as direct materials, direct labor and manufacturing overhead. Decision criteria Weight Rationale 5 Period Costs vs Product I00% costs In determining whether income-generating items can be lucrative in the long run, managers can use period costs and product costs. Variable Costs vs Fixed Costs A rise in the total cost of variable expenses, while fixed costs remain constant within the relevant range when the level of output rises or falls, increases the total cost of output (e.g rent, property taxes) Decision criteria Weight Variable costs vs fixed costs I00% Rationale Quantitative estimates of cost per unit and total costs at various output levels are provided. Revised income statement Al- Salahi Construction Company Income Statement For the Year Ended December 31, 2013 Sales revenues (18,200 equipment hours @ $165 per hour) Production costs 3,003,0 00 Direct material Pipe Direct labor Machine operators Other direct labor Overhead Supervisory salaries Tires and fuel 1,401,340 218,000 265,700 70,000 418,600 100% 6 Depreciation equipment Salaries of mechanics Gross profit Less: Selling expense Sales salaries Advertising Administrative expense Utilities Rent, office building CPA fees Administrative salaries Operating income 198000 50,000 57,000 15,000 24,000 24,000 20,000 57,000 2,6 21,640 381,360 87.3% 12.7% 72,000 2.4% 125,000 184,360 4.2% 6.1% Name: Description: ...
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.
Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4