alleryStart learning →In process costing, the costs of a manufactured item are grouped into which two categories?
ADirect materials and conversion costs
BDirect materials and period costs
CPrime costs and factory overhead
DDirect labor and conversion costs
Answer & Solution
Correct answer: A. Direct materials and conversion costs
1. A manufactured item still carries three costs: direct materials, direct labor and factory overhead.
2. Conversion costs are direct labor plus factory overhead taken together.
3. Process costing therefore works with two costs, direct materials and conversion costs.
4. Pairing direct labor with conversion costs would double count labor, since labor is already inside conversion.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 3.2 Process Costing Transactions for a Manufacturing Company_
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