Throughout the chapter, we treated conversion costs (direct labor and manufacturing overhead) as a single resource....

Throughout the chapter, we treated conversion costs (direct labor and manufacturing overhead) as a single resource. Why could we do this without distorting the resulting costs? When would we need to treat them separately?

Expert Solution

Total cost of a product is comprised of three elements. ( 1) Material (2) labour and (3) Overhead. In process costing, where most of the organisations choosing this cost accounting system belong to continous production centers we see that conversion cost comparising labor and overhead are incurred in same proportion to work in process. That means most cases we see same percentage of work in process for both of these conversin costs. Thus combining these two different costs into one cost pool does not create any trouble in determination of resulting cost.

Thus we will have same resulting cost wether we compute three cost elements or only two cost elements.

When would we need to treat them separately?

But where there is unequal progress or absence of perfect synchronization between these two conversion cost components, we should seperate them and find the cost per unit in respect of all the three components seperately.

ekkarill92 answered 2 years ago

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