Conversion costs are expenses for overhead and direct labor related to the conversion of raw materials into

products.

Conversion costs are similar to prime costs, except that the latter consists of costs related to direct labor and direct materials, not direct labor and overhead.

Conversion Costs

- are expenses incurred when turning raw materials into a product.

- include direct labor and overhead expenses.
47. During the month of May, Bennett Manufacturing Company purchased $43,000 of raw materials. The manufacturing overhead totaled $27,000 and the total
manufacturing costs were $106,000. Assuming a beginning inventory of raw materials of $8,000 and an ending inventory of raw materials of $6,000, direct labor
must have totaled:
 a. $34,000.
b. $38,000.
c. $36,000.
d. $45,000.

*Solution:

8,000 - Beg. Raw Materials Inventory

(+) 43,000 - Purchases of Raw Materials

51,000 - Total Raw Materials Available for Use

(-) 6,000 - End. Raw Materials Inventory

45,000 - Direct Materials used in production - DM

34,000 - Direct Labor - DL

27,000 - Factory Overhead - FOH

106,000 - Total Manufacturing Costs

45. The regression analysis results for ABC Co. is shown as y = 90x + 45. The standard error (Sb) is 30 and coefficient of determination (r²) is 0.81. The budget calls
for production of 100 units. What is the ABC’s estimate of total costs?

a. P3,090
b. P4,590
c. P9,030
d. P9,045
Product cost is an accounting term that refers to the total costs involved in making a product and getting it ready for sale.

In manufacturing, product costs are expenditures that include the cost of raw materials, labor and manufacturing overhead.

Product Costs (Inventoriable)

- are those directly related to the production of a product or service intended for sale.
- a manufacturer, for example, would have product costs that include: direct labor, raw materials, manufacturing supplies, overhead that is directly tied to
the production facility such as electricity.
- for a retailer, the product costs would include the supplies purchased from a supplier and any other costs involved in bringing their goods to market.
31. The following information summarizes total production costs and number of units of product produced by Company B over the last 6 months:

Month Total Cost Units Produced

1 P24,000 30,000

2 30,000 42,000

3 28,000 40,000

Month Total Cost Units Produced

4 P27,000 34,000

5 25,000 32,000

6 23,000 31,000

Using the high-low method, the estimated cost function for this product is

a. Y = P9,000 + P0.500 x number of units produced.

b. Y = P7,500 + P0.585 x number of units produced.
c. Y = P3,285 + P0.636 x number of units produced.
d. Y = P 493 + P0.726 x number of units produced.

*Solution:

Highest activity cost – lowest activity cost

Highest activity units – lowest activity units

(P30,000 – P24,000) / (42,000 units – 30,000 units) = P6,000 / 12,000 units = P0.50 for the highest and lowest values of the cost driver

Y = total cost a = fixed cost

b = variable cost per unit x = activity level

Formula: Y = a + bx

P30,000 = a + P0.50(42,000 uniits)

a = P21,000 – P30,000

a = (P9,000)