PTP Limited produces detergents. Normal losses from the detergent making process are 10% of materials input. Normal and abnormal losses from the process incur a disposal cost of £3.00 per litre. During February, 10,000 litres of material were used in the process at a cost of £30 per litre. The unit cost used to value finished output, abnormal gains and abnormal losses is £50. What is the conversion (labour and overhead) cost for the month of February?

Question

Quizplus · Accepted Answer

The conversion cost is calculated by subtracting the material cost and disposal cost of normal losses from the total cost of production. Total material cost is 10,000 litres x £30 = £300,000. Normal loss is 10% of 10,000 litres = 1,000 litres. Disposal cost for normal loss is 1,000 litres x £3 = £3,000. Total cost of production is 10,000 litres x £50 = £500,000. Conversion cost = £500,000 - £300,000 - £3,000 = £197,000.

PTP Limited Produces Detergents