Prime and Conversion Costs
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ScribdTranslationsPrime and Conversion Costs
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ScribdTranslationsPRIME COSTS AND CONVERSION COSTS
Relationship with production
This is closely related to the cost elements of a
product and the main objectives of planning and control. The
Two categories, based on their relationship with production are:
PRIME COSTS
. Definition:
They are direct materials and direct labor. These costs are
directly related to production. For example, the cost of the
labor (doctors, nurses, etc.) and direct materials (examination and
treatment. Amount of direct material and direct labor that
they intervene in the manufacturing of a product.
The prime cost is nothing more than the result of adding theraw materialand the
cost of direct labor.
. Applicability:
They are used in industrial companies to determine the cost of
production is necessary to prepare a cost statement, in which it
they consider expenditures such as raw materials and direct labor,
factors that together are known as prime cost, which is one of the
parts of the cost statement.
To produce a good or merchandise, the company needs to buy raw materials.
raw materials, which will later be transformed into a final product.
To determine the cost incurred by a company to manufacture a
producto, se debe llevar un registro y un control de todos los elementos que
they make up that cost, including the necessary raw materials in the
elaboration of your product.
Now, to process the raw material, staff is required to
directly shape and process the raw material; this is what is known
as direct labor.
Within direct labor, as is obvious, it does not include the
staff expenses that do not directly participate in the process of
transformation of raw material, such as in the case of secretaries,
sellers, executives, etc.
Within the personnel expenses that make up direct labor,
all the concepts paid to them are included, such as
salariessocial benefits, social securitycontributions
parafiscalsupply, etc.
The cost structure will then be:
Prime costs = Direct Materials + Direct Labor
Where
Direct Raw Material: DRM
Direct Labor: DL
. COST OF CONVERSION:
. Definition:
It is the cost of transforming direct materials into the product.
finished, using direct labor (D L) or direct work and
applying all the indirect manufacturing costs that are related
with the product (C I F).
Expressed symbolically, the Conversion Cost is:
COSTO DE CONVERSION = M O D + C I F
. Applicability:
Its importance lies in the fact that the company has the raw material available.
necessary directive for the manufacturing can be established for the purposes of the
decision making and control of the production process what is the impact of
the costs of direct labor and indirect costs of
manufacturing, in the transformation or conversion of those raw materials
in the manufactured product
.
. EXAMPLE:
The CIA Cookies of the Caribbean whose corporate purpose is the manufacture of
cookies, has the following information during a process
productive
Fritters $100,000 Preventive maintenance. $5,000
Chocolate cream $40,000 Pastry chef salary $20,000
Sueldo del supervisor $10.000 Factory doorman $7,000
Accept $20,000 Machinery insurance $4,000
Secretary of Production salary $8,000 Flour $30,000
Pastry assistant $6,000 Public Services $3,000 (light production)
Machinery Dep. $12,000 Boxes x unit. $200
Eggs $6,000 Salesperson salary $12,000
The company produced 20 boxes of 12 units each. The request is:
determine the production cost (DM, DL, MOH):
Determine the prime costs and conversion costs
Solution:
Raw material
Direct labor Indirect Costs
direct
Crisps $100,000 Pastry chef $20,000 Department of Production $8,000
Chocolate cream Pastry Assistant $
Oil $20,000
$40.000 6.000
Flour $30,000 Huevos $6.000
Boxes x each. $200
Public Services $3,000 (electricity
prod.)
Factory caretaker $7,000
Preventive maintenance.
$5.000
Production Machinery Dept.
$12.000
Machinery insurance $4,000
Supervisor's salary
$10,000
Total value of boxes: 20 boxes * 200 = 400
Production cost:
MPD + MOD + CIF = CPD
170,000 + 26,000 + 79.000 = 275,000
Costo de Producción = 275.000
Cost of Premium:
MPD + MOD = CP
170.000 +26.000 = 176.000
Conversion Cost:
MOD + CIF = CC
