Question

Pluton makes particular plastics for sale to the public and the government. Basic cost data for a 100-pound drum of one particular product called Xentra appears below: Qty Cost Chemical Xeta, gals 15 $25.00 Chemical Thenta, gals 35 $27.50 Base material, lbs 20 $1.00 100-lb lined drum 1 $51.83 Assuming normal production levels, what is the conversion cost (direct labor and overhead) per drum? Variable factory overheads are estimated to be $1,200,000 per month, when 1,000,000 pounds of various products are produced. The plant employs 20 chemical workers who typically work 175 hours each per month and are paid $24 per hour. Other workers are classified as indirect and are included in fixed overheads. The highly automated plant typically runs 21,000 machine hours per month. The preparation of one 100 lbs batch of Xentra needs ten minutes of direct labor and 75 minutes of machine time. Fixed manufacturing overheads total $3,500,000 per month. Forty percent of these fixed manufacturing overheads are labor-related costs and the balance are machine-related costs. A $191.67 B) $287.40 C) $311.67 D) $315.67 E) None of the above

Answer 1

Answer:

Option (D) is correct.

Explanation:

Variable overhead per pound:

= variable overheads ÷ pounds of products to be produced

= 1,200,000 ÷ 1,000,000

= 1.2

Direct labor hours = 20 workers × 175 hours

                              = 3,500

Direct labor cost = Direct labor hours × 24

                            = 3,500 × 24

                            = 84,000

Machine hours = 21,000

Fixed overhead = $3,500,000 per month

Labor related (40%) = 1,400,000 ÷ 3,500 hours

                                 = 400

Machine related (60%) = 2,100,000 ÷ 21,000 hours

                                      = 100

Total cost of conversion:

= Direct labor cost + Variable overheads + Fixed overheads

= Direct labor cost + Variable overheads + (Labor related + Machine related)

= 10 min(24 ÷ 60 min) + (100 × 1.2) + [(400 ÷ 60)× 10 + (100 ÷ 60)× 75]

= 4 + 120 + 66.66666667 + 125

= 315.66666667