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Hatch Manufacturing produces multiple machine parts. The theoretical cycle time for one of its products is 65 minutes per unit. The budgeted conversion costs for the manufacturing cell dedicated to the product are $12,960,000 per year. The total labor minutes available are 1,440,000. During the year, the cell was able to produce 0.6 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. 2. Compute the applied conversion cost per minute (the amount of conversion cost actually assigned to the product). 3. Discuss how this approach to assigning conversion cost can improve delivery time performance. Explain how conversion cost acts as a performance driver for on-time deliveries.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 13, Problem 8E
Textbook Problem
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Hatch Manufacturing produces multiple machine parts. The theoretical cycle time for one of its products is 65 minutes per unit. The budgeted conversion costs for the manufacturing cell dedicated to the product are $12,960,000 per year. The total labor minutes available are 1,440,000. During the year, the cell was able to produce 0.6 units of the product per hour. Suppose also that production incentives exist to minimize unit product costs.

Required:

  1. 1. Compute the theoretical conversion cost per unit.
  2. 2. Compute the applied conversion cost per minute (the amount of conversion cost actually assigned to the product).
  3. 3. Discuss how this approach to assigning conversion cost can improve delivery time performance. Explain how conversion cost acts as a performance driver for on-time deliveries.

1.

To determine

Calculate the theoretical conversion cost per unit.

Explanation of Solution

Conversion cost:  The cost of changing the materials into a finished product. It includes direct labour costs and manufacturing overhead costs.

Cycle time: Cycle time and velocity are two operational “measures of responsiveness”. Cycle time is the span of time taken to produce a unit of output from the time the materials are received till the good is supplied to finished goods inventory. Therefore, cycle time is the time taken to produce a product.

Calculate theoretical conversion cost per unit:

Theoretical conversion cost per unit}=Theoreticalrate×Theoreticalcycletime=$9(1)×65minutes

2.

To determine

Calculate the applied conversion cost per minute.

3.

To determine

Discuss the manner in which this approach can improve delivery time performance by assigning conversion costs.

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Chapter 13 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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