Problem 11-47 (Appendix 11A) Cycle Time, Velocity, Conversion Cost

The theoretical cycle time for a product is 30 minutes per unit. The budgeted conversion costs for the
manufacturing cell are 2,700,000 per year. The total labor minutes available are 600,000. During the
year, the cell was able to produce 1.5 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 unit (the amount of conversion cost actually assigned
to the product)
3. CONCEPTUAL CONNECTION Discuss how this approach to assigning conversion costs can
improve delivery time performance.

Actual Conversion Cost per Unit

Standard cost per minute = Annual conversion costs / Productive minutes available

Actual Cycle Time = Theoretical Cycle Time / Actual Velocity

Actual conversion costs = Standard cost per minute x Actual cycle time

Theoretical Conversion Costs per Unit

Theoretical Cycle Time = Theoretical Cycle Time / Theoretical Velocity

Theoretical Conversion Costs = Standard Cost per minute x Theoretical Cycle Time

SOLUTION & ANSWERS

Theoretical Cycle Time : 30 minutes per unit

Budgeted Conversion Cost per year : 2,700,000

Total Labor minutes available : 600,000

: 1.5 units of the product per hour

Standard Cost per minute = 2,700,000 / 600,000

= 4.5 per minute

Actual Cycle Time = 30 minutes / 1.5 units

= 20 minutes per unit

Actual Conversion Cost = 4.5 x 20

= 90 per unit

Theoretical Cycle Time = 30 minutes / 17 minutes (20 minutes per unit – 4.5 per minute + 1.5 unit)

= 1.76 minutes per unit

Theoretical Conversion Cost = 4 x 1.76

= 7.04 per unit