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:

Direct materials (raw compost).

Direct labor (wages of mixing staff).

Depreciation of the mixing machinery.

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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Practice the full ACCA MA — Management Accounting Practice Exam 4

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