Prime and conversion costs Identify the following costs as a prime cost (P), conversion cost (C), or both (B) for a maga- zine publisher: A Paper used for the magazine B

Answer:

Identification of Prime cost and conversion costs:

(A) Paper used for the magazine — Prime cost (P)

Paper is used as a raw material to construct a product.

(B) Wages of printing machine employees — Both (B)

Wages are the direct labour cost which are included in both prime cost and conversion cost.

(C) Glue used to bind magazine — Conversion cost (C)

Glue is used to convert raw materials into finished product.

(D) Maintenance on printing machines — Conversion cost (C)

Maintenance is included in the conversion cost as it is also indirectly used in manufacturing process.  

Prime costs are the costs which are directy used in the manufacturing process. Prime cost includes direct materials cost and direct labour cost but it does not include indirect costs such as administration expenses. Prime costs are used by businesses to calculate profit or to decide the price of finished product.

Conversion costs are the costs which are indirectly used in the manufacturing process. These costs are used to convert raw materials into finished products. It includes direct labour cost and factory overheads. In other words, conversion costs are the manufacturing costs except direct materials cost. Examples of conversion costs — Factory rent, Maintenance, Machining, Supplies etc.