Question

Exercise 4 (Classification of costs, prime and conversion costs) Tanaka Metal Products reports the following components in its manufacturing costs for April 20X1 (in thousands): Direct costs: P430 Direct materials Direct manufacturing labor salaries Subcontracting 110 120 P 660 Manufacturing overhead: Fringe benefits on direct manufacturing labor Production setup Other manufacturing overhead 40 60 340 P1,000 240 Subcontracting costs are treated as a direct-cost item separate from direct materials. Required 1. Compute (a) the prime costs and (b) the conversion costs of Tanaka Metal Products using the cost classifications described above 2. Assume now that Tanaka changes the classification of two items both fringe benefits on direct manufacturing labor and production setups will now be classified as direct costs. Compute (a) the prime costs and (b) the conversion costs of Tanaka after this change in cost classifications, and comment on the results. information might Tanaka use to change two items in requirement 2 to be direct-cost items rather than manufacturing overhead cost items?

Answer 1

1. a. Prime costs = Direct Materials + Direct Manufacturing Labor + Subcontracting = P 430 + P 110 + P 120 = P 660

b. Conversion costs = Direct Manufacturing Labor + Subcontracting costs + Manufacturing Overhead = P 110 + P 120 + P 340 = P 570.

2. a. Prime Costs = P 660 + P 40 + P 60 = P 760

b. Conversion Costs = Total Manufacturing Costs - Direct Materials = P 1,000 - P 430 = P 570.

Prime costs have increased, but conversion costs remain the same.

3. The number of setups, and the number of direct manufacturing laborers.