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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.

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Most popular questions from this chapter

Selected production and cost data of Laura’s Caliper Co. follow for May 2018:

Mixing Department

Heating department

Units to account for :

  • Beginning WIP, April 30

25,000

10,000

  • Started in May

90,000

  • Transferred in during May

90,000

Total units to account for

115,000

100,000

Units accounted for:

  • Completed and transferred out during may

90,000

82,000

  • Ending WIP, May 31

25,000

18,000

Total units accounted for

115,000

100,000

On May 31, the Mixing Department ending Work-in-Process Inventory was 80%

complete for materials and 45% complete for conversion costs. The Heating Department ending Work-in-Process Inventory was 60% complete for materials and 35% complete for conversion costs. The company uses the weighted-average method. Requirements

1. Compute the equivalent units of production for direct materials and for conversion costs for the Mixing Department.

2. Compute the equivalent units of production for transferred in costs, direct materials, and conversion costs for the Heating Department.

What is the weighted-average method for process costing systems?

Ocean Worthy uses three processes to manufacture lifts for personal watercraft: forming a lift’s parts from galvanized steel, assembling the lift, and testing the completed lift. The lifts are transferred to Finished Goods Inventory before shipment to marinas across the country.

Ocean Worthy’s Testing Department requires no direct materials. Conversion costs are incurred evenly throughout the testing process. Other information follows for the month of August:

UNITS

Beginning work-in-process inventory

2,000 units

Transferred in from assembling department during the period

7,000 units

Completed during the period

4,000 units

Ending work in process inventory (40% complete for conversion work)

5,000 units

COSTS

Beginning work in process inventory (transferred in costs, \(93,400, conversion costs, \)18,100)

$111,500

Transferred in from the assembly department during the period

672,000

Conversion cost added during the period

54,000

The cost transferred into Finished Goods Inventory is the cost of the lifts transferred out of the Testing Department. Ocean Worthy uses weighted-average

process costing.

Requirements

1. Prepare a production cost report for the Testing Department.

2. What is the cost per unit for lifts completed and transferred out to Finished Goods Inventory? Why would management be interested in this cost?

Miller Company sells several products. Sales reports show that the sales volume of its most popular product has increased the past three quarters while overall profits have decreased. How might production cost reports assist management in making decisions about this product?

Question: List ways in which job order costing systems are similar to process costing systems.
See all solutions

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