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31 July, 08:02

EB2.

LO 4.2Choco’s Chocolates incurs the following costs for the month:

What is the prime cost?

What is the conversion cost?

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Answers (1)
  1. 31 July, 08:22
    0
    The question is incomplete; the complete question is given below:

    $

    Direct materials 15,000.00

    Direct labor 25,000.00

    Factory depreciation expense 45,000.00

    Factory utilities expense 2,000.00

    Payroll staff's salary 15,000.00

    Prime cost = $40,000, Conversion cost = $72,000

    Explanation:

    Prime cost: It is the summation of all direct costs. Direct costs are costs that are incurred directly for a particular product, and therefore can be traced to it.

    Examples of direct costs include; direct material costs, direct labour cost and direct expense

    Direct materials cost: the costs of all materials used directly to manufacture a product. For example, cocoa powder, vanilla used in making chocolate. Every other materials costs are indirect material costs

    Direct labor cost: the cost of the labor hours of workers actively involved in the production of a product. For example, the cost of the total hours paid to workers for packing the chocolates into cartons. Every other labor costs are indirect labor costs

    Prime cost = Direct material cost + Direct labour cost + Direct expense

    Prime cost = $15,000 + $25,000 = $40,000

    Conversion cost = The sum of direct labour costs and manufacturing overheads

    Conversion cost = $25,000 + $45,000 + $2000 = $72,000

    Note that payroll staff cost was excluded because payroll function is an administrative activitiy not manufacturing.
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