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Define the following: direct material costs, direct manufacturing-labor costs, manufacturing overhead costs, prime costs, and conversion costs.

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Direct material costs refer to the cost of raw materials used in the production process, while direct manufacturing-labor costs are wages paid to employees directly involved in creating the final product. Manufacturing overhead costs are indirect costs that cannot be traced to each output unit. Prime costs combine direct material and labor costs, as the primary costs of production. Conversion costs are the combined total of direct manufacturing-labor costs and manufacturing overhead costs, showing expenses incurred in converting raw materials into finished products.
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Step 1: Direct Material Costs

Direct material costs refer to the cost of raw materials and components used in the production process of a manufactured item. These are costs that can be easily traced to each unit of output, as they are a direct part of creating the finished product.

Step 2: Direct Manufacturing-Labor Costs

Direct manufacturing-labor costs refer to the wages and salaries paid to employees involved in the production process of a manufactured item. These workers participate in tasks that have a direct impact on creating the final product, such as machine operators, assembly workers, or quality control inspectors.

Step 3: Manufacturing Overhead Costs

Manufacturing overhead costs refer to all indirect costs associated with the production process that cannot be traced directly to each unit of output. These costs include, but are not limited to, utilities, insurance, depreciation or lease payments on machinery and equipment, maintenance and repair expenses, and indirect labor costs (such as supervisors and maintenance workers).

Step 4: Prime Costs

Prime costs refer to the combined total of direct material costs and direct manufacturing-labor costs. These are the primary costs associated with producing a manufactured item, as they include both the raw materials and the labor required for its production.

Step 5: Conversion Costs

Conversion costs refer to the combined total of direct manufacturing-labor costs and manufacturing overhead costs. They represent the expenses incurred to convert raw materials into finished products. Conversion costs are essential for understanding how efficiently a company is turning raw materials into saleable goods and can be useful in evaluating the company's overall profitability.

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Most popular questions from this chapter

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Year 1 financial data for the ABC Company is as follows: Sales\(\quad$$\$ 5,000,000\) Direct materials\(\quad\)850,000 Direct manufacturing labor\(\quad\)1,700,000 Variable manufacturing overhead\(\quad\)400,000 Fixed manufacturing overhead\(\quad\)750,000 Variable \(\mathrm{SG} \& \mathrm{A}$$\quad\)150,000 Fixed \(\mathrm{SG} \& \mathrm{A}$$\quad\)250,000 Under the absorption method, Year 1 cost of Goods sold will be: a. \(\$ 2,550,000\) b. \(\$ 2,950,000\) c. \(\$ 3,100,000\) d. \(\$ 3,700,000\)

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