What are the sum of direct labor and manufacturing overhead costs referred to in a process costing system?

In a process costing system, the sum of direct labor and manufacturing overhead costs is referred to as conversion costs. This term encompasses the costs necessary to convert raw materials into finished products. Direct labor represents the labor costs of workers who are directly involved in the production process, while manufacturing overhead includes all indirect costs associated with production, such as utilities, depreciation on equipment, and supervisor salaries. These two components are critical for assessing the overall expense incurred in the transformation of materials into finished goods, which is essential for calculating the total cost of production and determining product pricing and profitability.

Total manufacturing costs, while related, encompass not only conversion costs but also direct materials costs, which are not included in the definition of conversion costs. Finished goods inventory refers specifically to products that have completed the manufacturing process and are ready for sale, and manufacturing costs generally refer to the total of all costs involved in the manufacturing process, which includes more than just conversion costs. Thus, the distinction of conversion costs as the sum of direct labor and manufacturing overhead is vital in understanding cost accounting in a process costing context.