Question

Cycle Time and Conversion Cost per Unit

Hatch Manufacturing produces multiple machine parts. The theoretical cycle time for one of its products is 70 minutes per unit. The budgeted conversion costs for the manufacturing cell dedicated to the product are $756,000 per year. The total labor minutes available are 108,000. During the year, the cell was able to produce 1.2 units of the product per hour. Suppose also that production incentives exist to minimize unit product costs.

Required:

1. Compute the theoretical conversion cost per unit.
$ per unit

2. Compute the applied conversion cost per unit (the amount of conversion cost actually assigned to the product).
$ per unit

Answer 1

(1)

theoretical conversion cost per unit = theoretical rate x theoretical cycle time

= $7 per minute x 70 minutes

= $490

where,

theoretical rate = budgeted conversion cost for the manufacturing cell / total labor minutes available

= $756000/108000 = $7 per minute

(2)

applied conversion cost per unit = $7 x (60/1.2) minutes

= $7 per minutes x 50 minutes

= $350