The HOW and WHY of Calculating Prime Cost, Conversion Cost, Variable Product Cost, and Total Product Cost
Information:
Carreker Company manufactures cell phones. For next year, Carreker predicts that 30,000 units will be produced, with the following total costs:
Direct materials $150,000
Direct labour 90,000
Variable overhead 30,000
Fixed overhead 450,000
Why:
Product costs are basic to management control and decision making. Managers use these costs for budgeting to check the impact of an increase or a decrease in unit sales on operating income. Since fixed costs stay the same when units change, knowledge of prime cost, conversion cost, variable product cost, and overall product cost give important information, allowing analysis of costs at differing levels of production.
Required:
1. Calculate the prime cost per unit.
2. Calculate the conversion cost per unit.
3. Calculate the total variable product cost per unit.
4. Calculate the total product (manufacturing) cost per unit.
5. What if 32,000 cell phones could be manufactured next year? Explain in words how that would affect the unit prime cost, the unit conversion cost, the unit variable product cost, and the unit total product cost.