Which costs include direct labor and manufacturing overhead?

The reason the answer is conversion costs is that this category encompasses all costs required to convert raw materials into finished products, specifically highlighting the costs associated with direct labor and manufacturing overhead. Direct labor refers to the labor costs directly associated with the production of goods, while manufacturing overhead includes all indirect manufacturing costs that cannot be directly traced to the finished product.

Together, these components represent the efforts and expenses needed to transform raw materials into a sellable product. Understanding this distinction is crucial for managerial accounting, as it affects the overall costing, pricing strategy, and profitability analysis.

In contrast, prime costs refer specifically to the sum of direct materials and direct labor, excluding manufacturing overhead. Period costs are associated with selling and administrative expenses that are not directly tied to production. Direct costs are a broader category that includes any costs that can be directly traced to a specific cost object, but they do not specifically combine labor and overhead like conversion costs do.