Question

Cycle Time and Conversion Cost per Unit

Hatch Manufacturing produces multiple machine parts. The theoretical cycle time for one of its products is 55 minutes per unit. The budgeted conversion costs for the manufacturing cell dedicated to the product are $1,320,000 per year. The total labor minutes available are 120,000. 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:

= (budgeted conversion costs / total labor minutes) * theoretical time per unit

= ($1,320,000/120,000)×55

= $605 per unit

2)

Applied conversion cost per unit:

= (budgeted conversion costs / total labor minutes) * actual minutes per unit

= ($1,320,000/120,000)×50

= $550 per unit

NOTE: Actual minutes per unit are calculated as:

since it is given that 1.2 units are produced in 1 hour or 60 minutes

hence 1 unit will be produced in (60/1.2) minutes = 50 minutes per unit