In calculating unit cost in a process costing system, conversion cost is defined as the sum of:

INTRODUCTION TO COST ACCOUNTING

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

In calculating unit cost in a process costing system, “conversion cost” is defined as the sum of:

A	Direct and indirect material costs.
B	Direct and indirect labor costs.
C	Direct labor and factory overhead costs.
D	Indirect labor and factory overhead costs.
E	Indirect material and factory overhead costs.

Explanation:

Detailed explanation-1: -With process costing, companies determine item cost by tracking the cost of each stage in the production process, instead of tracking costs for each individual item. After adding up the cost of all the steps in the process, they divide the total cost by the number of items. This is called the cost per unit.

Detailed explanation-2: -Conversion cost is the sum of direct labor and manufacturing overhead costs incurred to turn raw materials into a finished product. Conversion costs are used in the generation of a manufacturing firm’s income statement and balance sheet if process costing is used as well as assist in product pricing.

Detailed explanation-3: -Conversion costs include direct labor and overhead expenses incurred as a result of the transformation of raw materials into finished products.

Detailed explanation-4: -Conversion cost is the sum of direct labor plus manufacturing overhead costs. These are the costs required to turn (convert) a raw material into a finished product.

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