Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 18: Q8RQ (page 1005)

Question: What are conversion costs? Why do some companies using process costing systems use conversion costs?

Short Answer

Expert verified

Answer:

Conversion cost means the total of direct labor cost and the factory overhead costs.

Some companies using the process costing system use the conversion cost because the companies using the process costing system are highly automated, so the direct labor is a small part of total manufacturing cost. For simplifying the accounting in this case, direct labor is combined with manufacturing overhead.

Step by step solution

01

Conversion cost

The conversion cost means the total cost incurred by the company for converting the raw material into the useful products.

02

Company using process costing use the conversion cost

The automated companies in which labor cost is negligible may use the conversion cost while using the process costing system for simplifying the accounting procedures.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Happy Colors manufactures crayons in a three-step process: mixing, molding, and packaging. The Mixing Department combines the direct materials of paraffin wax and pigments. The heated mixture is pumped to the Molding Department, where it is poured into molds. After the molds cool, the crayons are removed from the molds and are transferred to the Packaging Department, where paper wrappers are added and the crayons are boxed.

In the Mixing Department, the direct materials are added at the beginning of the

process and the conversion costs are incurred evenly throughout the process. Work in process of the Mixing Department on April 1, 2018, consisted of 300 batches of crayons that were 30% of the way through the production process. The beginning balance in Work-in-Process Inventory—Mixing was \(27,800, which consisted of \)10,700 in direct materials costs and $17,100 in conversion costs. During April, 3,200 batches were started in production. The Mixing Department transferred 2,800 batches to the Molding Department in April, and 700 were still in process on April 30. This ending inventory was 80% of the way through the mixing process. Happy Colors uses FIFO process costing.

At April 30, before recording the transfer of costs from the Mixing Department

to the Molding Department, the Happy Colors general ledger included the following account:

Work-in-process inventory – Mixing

Balance, March 1

27,800

Direct materials

22,400

Direct labor

21,330

Manufacturing overhead

44,070

Requirements

1. Prepare a production cost report for the Mixing Department for April. Round

equivalent unit costs to four decimal places. Round all other costs to the nearest

dollar.

2. Journalize all transactions affecting the Mixing Department during April, including the entries that have already been posted. Assume the labor costs are accrued and not yet paid.

Question: Refer to Short Exercises S18-8 and S18-9. Use Complete Foods’s costs per equivalent unit of production for direct materials and conversion costs that you calculated in Short Exercise S18-9.

Calculate the cost of the 38,000 units completed and transferred out and the

24,000 units, 20% complete, in the ending Work-in-Process Inventory.

Match each costing system characteristic to job order costing, process costing, or both.

1. Used by companies that manufacture identical items through a series of uniform production steps or processes

2. Transfers costs from Work-in-Process Inventory to Finished Goods Inventory to Cost of Goods Sold

3. Used by companies that manufacture unique products or provide specialized services

4. Has multiple Work-in-Process Inventory accounts

5. Tracks direct materials, direct labor, and manufacturing overhead costs

Question: What types of companies use process costing systems?

Question: Why is the calculation of equivalent units of production needed in a process costing system?
See all solutions

Recommended explanations on Business Studies Textbooks

Organizational Communication

Read Explanation

Business Development

Read Explanation

Financial Performance

Read Explanation

Intermediate Accounting

Read Explanation

Corporate Finance

Read Explanation

Nature of Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free