A prime cost is the total direct costs of production, including raw materials and labor.

Indirect costs, such as utilities, manager salaries, and delivery costs, are not included in prime costs.

Prime Costs

- are expenditures directly related to creating finished products.

- include direct material and direct labor costs.
23. Wheel and Tire Manufacturing currently produces 1,000 tires per month. The following per unit data apply for sales to regular customers:

Direct materials P20

Direct manufacturing labor 3

Variable manufacturing overhead 6

Fixed manufacturing overhead 10

Total manufacturing costs P39

The plant has capacity for 3,000 tires and is considering expanding production to 2,000 tires. What is the total cost of producing 2,000 tires?

a. P39,000
b. P78,000
c. P68,000
d. P62,000

*Solution:

DM (P20 x 2,000 units) + DL (P3 x 2,000 units) + VOH (P6 x 2,000 units) + FOH (P10 x 1,000 units) = P40,000 + P6,000 + P12,000 + P10,000 = P68,000

38. A hotel has recorded that the costs incurred were P570 when 340 guests stayed for one night. They know that the fixed laundry cost is P400 per night. What
is the variable laundry cost per guest-night (to the nearest cent)?

a. P 0.50
b. P 1.18
c. P 1.68
d. None of the above

*Solution:

Y = total cost a = fixed cost

b = variable cost per unit x = activity level

Formula: Y = a + bx

P570 = P400 + b(340 guests)

P570 = P400 + 340b

340b = P400 – P570

340b = -P170
340 340

b = P0.50
Differential cost refers to the difference between the cost of two alternative decisions.

The cost occurs when a business faces several.

Differential Costs

- refers to the difference between the cost of two alternative decisions.

- occurs when a business faces several similar options, and a choice must be made by picking one option and dropping the other.
44. Green Company's costs for the month of August were as follows: direct materials, $27,000; direct labor, $34,000; sales salaries, $14,000; indirect labor,
$10,000; indirect materials, $15,000; general corporate administrative cost, $12,000; taxes on manufacturing facility, $2,000; and rent on factory, $17,000. The
beginning work in process inventory was $16,000 and the ending work in process inventory was $9,000. What was the cost of goods manufactured for the
month?

a. $105,000
b. $132,000
c. $138,000
d. $112,000

45. A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,700 and is paid at the beginning of
the first year. Eighty percent of the premium applies to manufacturing operations and 20% applies to selling and administrative activities. What amounts should
be considered product and period costs respectively for the first year of coverage?

Product Period

a. $2,700 $0
b. $2,160 $540
c. $1,440 $360
d. $720 $180
Conversion costs are expenses for overhead and direct labor related to the conversion of raw materials into products.

Conversion costs are similar to prime costs, except that the latter consists of costs related to direct labor and direct materials, not direct labor and overhead.

Conversion Costs

- are expenses incurred when turning raw materials into a product.

- include direct labor and overhead expenses.
47. During the month of May, Bennett Manufacturing Company purchased $43,000 of raw materials. The manufacturing overhead totaled $27,000 and the total
manufacturing costs were $106,000. Assuming a beginning inventory of raw materials of $8,000 and an ending inventory of raw materials of $6,000, direct labor
must have totaled:
 a. $34,000.
b. $38,000.
c. $36,000.
d. $45,000.

*Solution:

8,000 - Beg. Raw Materials Inventory

(+) 43,000 - Purchases of Raw Materials

51,000 - Total Raw Materials Available for Use

(-) 6,000 - End. Raw Materials Inventory

45,000 - Direct Materials used in production - DM

34,000 - Direct Labor - DL

27,000 - Factory Overhead - FOH

106,000 - Total Manufacturing Costs

45. The regression analysis results for ABC Co. is shown as y = 90x + 45. The standard error (Sb) is 30 and coefficient of determination (r²) is 0.81. The budget calls
for production of 100 units. What is the ABC’s estimate of total costs?

a. P3,090
b. P4,590
c. P9,030
d. P9,045