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Carson Manufacturing, Inc. makes refrigerator replacement parts. In May, Carson produced 2,000 units. Costs incurred were as follows: Direct Labor per unit (2 hrs. @ $15/hr.): $30 Direct Materials per unit: $15 Indirect Labor (maintenance): $35,000 Indirect Materials (total used): $2,000 Manufacturing Overhead application rate (per unit): $5 Given this data, calculate the total Prime Costs for the units produced in the month of May.

Answer 1

Production of an item involves various costs.

Prime costs are the cost which is directly attributable to the production of each unit. It is the combination of direct material cost and direct labour cost and any direct expense. It doesn't include any conversion costs (costs incurred to convert raw materials into the finished product) like production overheads, administrative overheads, etc.

Therefore PRIME COST = DIRECT MATERIAL COST + DIRECT LABOUR COST + DIRECT EXPENSES.

DIRECT MATERIAL COST: Material which can be easily identified and allocated to the production unit. It varies directly with the volume of output.

DIRECT LABOUR: Labour directly engaged in the production and can be easily identified. It varies directly with the volume of output.

DIRECT EXPENSES: All direct costs other than the material and labours costs are termed as direct expenses. They are readily identifiable to the product.

In May, Carson produced 2,000 units. Costs incurred were as follows: Direct Labor per unit (2 hrs. @ $15/hr.): $30 Direct Materials per unit: $15

Prime cost = direct material cost + direct labour cost = (15*2000) + (30*2000) = 30000 + 60000 = $90000

Thus, the prime cost for 2000 units produced in may is 90000$.