 In this presentation we will take a look at multiple choice questions related to a process cost system looking at test taking skills as we go. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. First question the costs of direct labor and factory overhead per equivalent unit is called a total cost per equivalent unit b overhead cost per equivalent unit c direct cost per equivalent unit d useless cost number e conversion cost per equivalent unit so we'll go through this again see if we can use the process of elimination to narrow this down the costs of direct labor and factory overhead per equivalent unit is called so we got the direct labor factory overhead remember when we think about the cost of inventory anytime usually we have material labor and overhead material labor and overhead now we're combining those two items labor and overhead so we're kind of thinking well what could be the same about those two which not is the same about possibly the materials as we go through maybe they keep that in mind a total cost per equivalent unit so total cost per equivalent unit the cost of direct labor and overhead we might keep that for now but it seems like it's missing something because it doesn't have the materials possibly so then b says overhead overhead cost per equivalent unit and so it's got it's got overhead but it's also got the labor the cost for labor and overhead per equivalent unit so it seems like it can't just be overhead because it's got both of them i'm going to cross that out c says a direct cost per equivalent unit and so the direct costs are usually the materials and the labor not not the overhead overhead is indirect that's why it's and that's why it's an overhead so overhead's going to be typically indirect typically so it's not generally the direct costs and then d says useless cost number you know i mean they're probably not going to ask a question about a maybe they just maybe just made up a term uh and said here's a useless number but probably not and then e says conversion cost per equivalent unit so conversion costs that sounds like it could be something so we'll keep it with a and e and go through it again the costs of direct labor and factory overhead per equivalent unit is called either a total cost per equivalent unit or e conversion costs uh per equivalent unit and of those two note that if we think about the three factors material labor and overhead material is the thing that we are converting the labor and the overhead are the things that we use to convert the material from raw material to the finished good the inventory product so that's going to be so e is going to be the one we really want because that's going to be the conversion it's not not the the total cost per equivalent unit because again it's missing the materials so we'll go with the final answer the cost of direct labor and factory overhead per equivalent unit is called e conversion cost per equivalent unit next question using conversion cost per equivalent unit is often necessary because a direct materials and direct labor happen at the same point b all costs happen at the same point c equivalent cost per unit does not include conversion costs d that's just how it's done e a direct labor and factory uh often direct labor and factory overhead happen at the same rate so let's go through this again using the process of elimination using conversion cost per equivalent unit is often necessary because so we're going to think about this use of conversion costs now when we think about conversion costs we saw this in the prior uh the prior question which is also a test taking skill you might want to use note if you go through a full test of multiple choice questions uh some questions will actually answer themselves which is nice so you might be able to go back and kind of actually piece something together but the conversion costs note that if we think about the types of things that go into inventory we're talking about material we're talking about labor we're talking about overhead the material is the thing we're converting the labor the overhead then are the conversion factors those are the conversion costs so we're definitely we're considering then uh the labor and the overhead typically when we're considering conversion costs so using conversion costs per equivalent unit per equivalent unit is often necessary because a direct materials and direct labor happen at the same point so direct materials so we might think maybe kind of but really we buy the materials before the labor so i would think it would go materials and then labor but i'll keep that one for now and then b says all costs happen at the same point well that's i can't really be right because i mean we have to buy the materials and then we have to do the labor and then we you know so probably not happening all at the same time it's a process it's a process cost system c equivalent cost per unit does not include conversion costs so equivalent cost per unit does not include conversion costs that doesn't seem right but i'll keep it for now d says that's just how it's done um that's probably not an inappropriate answer we'd like more detail than that so and then e says direct labor and factory overhead happened at the same rate so that uh seems like man maybe it could be that and notice if we look at a and e they look very similar direct materials and direct labor happen at the same point the same point in time versus direct labor and direct material overhead happened at the same rate so they're not exactly the same it would be it would be more the same if they were all the same except for this last kind of word but the fact that they're worded somewhat similarly and different than all the other answers might mean that that would be more of the correct answer so that might make us look at c and say hmm can i eliminate c equivalent cost per unit does not include conversion cost it doesn't seem right because if we're talking equivalent cost per unit we're trying to estimate all the costs they are you know we're trying to estimate the costs that have been done so far which would include the materials and whatever conversion has happened up to this point so so it doesn't if it said it didn't include all conversion costs maybe right but doesn't seem like that would be it so let's keep it between a and e go through it again using conversion costs per equivalent unit is often necessary because a direct material and direct labor happen at the same point or e direct labor and factory overhead happen at the same rate now also we might think it's e because we're talking about labor and overhead which are their conversion costs so just that would probably have us think ma it's probably going to be e because we're talking about the things that are conversion costs as opposed to anything else and they happen at the same rate and that would basically mean that we can kind of group them together and so when we do some estimates we we have three things that we're talking about materials labor we're talking about the materials and then we're talking about the labor and the overhead we kind of group the overhead and the labor as one thing conversion costs and we could say well because they kind of happen at the same rate that and therefore we could do that we can group them together if that's the case and two it might be the case that that the labor is fairly low in cost because when you have something that we're producing in a process cost system it might be all mechanical in essence if we're just making something you can you can imagine an automated assembly line making taffy or something like that at all there might not be a whole lot of labor and therefore we can kind of group them together because of the immaterialness or the the smallness of the labor compared to the overhead possibly but in any case we're going to go to e and so the answer using conversion costs per equivalent unit is often necessary because e direct labor and factory overhead overhead happen at the same rate