ExpertMedium2 marksMultiple Choice
Nature, Source and Purpose of Management InformationSyllabus ACost ClassificationPrime and Conversion Costs
ACCA · Question 04 · Nature, Source and Purpose of Management Information
An agricultural cooperative produces organic fertilizer. Which of the following costs would be classified as a 'conversion cost' but NOT a 'prime cost'?
An agricultural cooperative produces organic fertilizer. Which of the following costs would be classified as a 'conversion cost' but NOT a 'prime cost'?
Answer options:
A.
Direct materials (raw compost).
B.
Direct labor (wages of mixing staff).
C.
Depreciation of the mixing machinery.
D.
Sales commissions paid to distributors.
How to approach this question
Recall the definitions: Prime Cost = Direct Materials + Direct Labor + Direct Expenses. Conversion Cost = Direct Labor + Production Overheads. Find the cost that is a production overhead.
Full Answer
C.Depreciation of the mixing machinery.✓ Correct
Prime costs consist of all direct costs (materials, labor, expenses). Conversion costs are the costs incurred to convert raw materials into finished goods (direct labor + production overheads). Depreciation of machinery is a production overhead, making it a conversion cost but not a prime cost.
Common mistakes
Selecting direct labor, forgetting that it belongs to both categories.
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