{"id":49,"date":"2024-09-27T17:48:01","date_gmt":"2024-09-27T17:48:01","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/chapter\/prime-and-conversion-costs\/"},"modified":"2024-09-27T17:58:46","modified_gmt":"2024-09-27T17:58:46","slug":"prime-and-conversion-costs","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/chapter\/prime-and-conversion-costs\/","title":{"raw":"Prime and Conversion Costs","rendered":"Prime and Conversion Costs"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Differentiate between prime and conversion costs<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\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\r\n<section class=\"textbox example\" aria-label=\"Example\">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.\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<\/section>Now, check your understanding of the difference between prime and conversion costs:\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm_question hide_question_numbers=1]217927[\/ohm_question]\r\n\r\n<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Differentiate between prime and conversion costs<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\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<section class=\"textbox example\" aria-label=\"Example\">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<\/section>\n<p>Now, check your understanding of the difference between prime and conversion costs:<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm217927\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217927&theme=lumen&iframe_resize_id=ohm217927&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/section>\n","protected":false},"author":6,"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 Accounting\",\"author\":\"Christine Jonick\",\"organization\":\"\",\"url\":\"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"lumen\",\"description\":\"Prime and Conversion Costs Venn Diagram\",\"author\":\"Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":40,"module-header":"- Select Header -","content_attributions":[{"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 Accounting","author":"Christine Jonick","organization":"","url":"https:\/\/ung.edu\/university-press\/books\/managerial-accounting.php","project":"","license":"cc-by-sa","license_terms":""},{"type":"lumen","description":"Prime and Conversion Costs Venn Diagram","author":"Lumen Learning","organization":"","url":"","project":"","license":"cc-by","license_terms":""}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/49"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/wp\/v2\/users\/6"}],"version-history":[{"count":1,"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/49\/revisions"}],"predecessor-version":[{"id":242,"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/49\/revisions\/242"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/40"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/49\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/wp\/v2\/media?parent=49"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=49"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/wp\/v2\/contributor?post=49"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/managerialaccounting\/wp-json\/wp\/v2\/license?post=49"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}