{"id":56,"date":"2021-01-26T21:54:14","date_gmt":"2021-01-26T21:54:14","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=56"},"modified":"2021-06-24T22:27:18","modified_gmt":"2021-06-24T22:27:18","slug":"prime-and-conversion-costs","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/prime-and-conversion-costs\/","title":{"raw":"Prime and Conversion Costs","rendered":"Prime and Conversion Costs"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Differentiate between prime and conversion costs<\/li>\r\n<\/ul>\r\n<\/div>\r\nWe\u2019ve previously learned about period and product costs and also direct and indirect costs. Products costs may also be further categorized as follows:\r\n<ol>\r\n \t<li><strong>Prime cost<\/strong> = direct labor + direct materials<\/li>\r\n \t<li><strong>Conversion costs<\/strong> = direct labor + factory overhead<\/li>\r\n<\/ol>\r\n<img class=\"alignnone wp-image-674\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/11193406\/1.2.3-Prime-and-Conversion-Costs1-300x156.png\" alt=\"Prime costs - direct materials plus direct labor, conversion costs - direct labor plus manufacturing overhead, then it is a venn diagram showing the mix between the two.\" width=\"623\" height=\"324\" \/>\r\n\r\nIn a labor-intensive process, prime costs will be large. In an automated process, conversion costs will be large. This information helps managers know where to focus their attention when planning, directing and controlling costs.\r\n<div class=\"textbox examples\">\r\n<h3>Example<\/h3>\r\nA manufacturing company produces kitchen cabinets. Direct materials include wood, hinges, and hardware. Direct labor is the cost of wages of factory employees who assemble the cabinets. Factory overhead includes expenditures for electricity and water bills, insurance premiums, roof repair, depreciation of machinery, materials used to build shelves in the factory, and wages of factory workers to assemble those shelves.\r\n\r\nAssume that direct materials cost $700, direct labor is $500, and factory overhead is $300 for cabinets that have been manufactured.\r\n\r\nPrime costs = $700 + $500 = $1,200\r\n\r\nConversion costs = $500 + $300 = $ 800\r\n\r\nTotal cost = $700 + $500 +$300= $1,500\r\n\r\n<\/div>\r\nNow, check your understanding of the difference between prime and conversion costs:\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]217927[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Differentiate between prime and conversion costs<\/li>\n<\/ul>\n<\/div>\n<p>We\u2019ve previously learned about period and product costs and also direct and indirect costs. Products costs may also be further categorized as follows:<\/p>\n<ol>\n<li><strong>Prime cost<\/strong> = direct labor + direct materials<\/li>\n<li><strong>Conversion costs<\/strong> = direct labor + factory overhead<\/li>\n<\/ol>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-674\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/11193406\/1.2.3-Prime-and-Conversion-Costs1-300x156.png\" alt=\"Prime costs - direct materials plus direct labor, conversion costs - direct labor plus manufacturing overhead, then it is a venn diagram showing the mix between the two.\" width=\"623\" height=\"324\" \/><\/p>\n<p>In a labor-intensive process, prime costs will be large. In an automated process, conversion costs will be large. This information helps managers know where to focus their attention when planning, directing and controlling costs.<\/p>\n<div class=\"textbox examples\">\n<h3>Example<\/h3>\n<p>A manufacturing company produces kitchen cabinets. Direct materials include wood, hinges, and hardware. Direct labor is the cost of wages of factory employees who assemble the cabinets. Factory overhead includes expenditures for electricity and water bills, insurance premiums, roof repair, depreciation of machinery, materials used to build shelves in the factory, and wages of factory workers to assemble those shelves.<\/p>\n<p>Assume that direct materials cost $700, direct labor is $500, and factory overhead is $300 for cabinets that have been manufactured.<\/p>\n<p>Prime costs = $700 + $500 = $1,200<\/p>\n<p>Conversion costs = $500 + $300 = $ 800<\/p>\n<p>Total cost = $700 + $500 +$300= $1,500<\/p>\n<\/div>\n<p>Now, check your understanding of the difference between prime and conversion costs:<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217927\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217927&theme=oea&iframe_resize_id=ohm217927\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-56\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Prime and Conversion Costs. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Managerial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php\">https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">Lumen Learning authored content<\/div><ul class=\"citation-list\"><li>Prime and Conversion Costs Venn Diagram. <strong>Authored by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":9,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Prime and Conversion Costs\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Managerial 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