What is conversion cost?


Conversion cost is the sum of all such costs that are incurred in converting one article into intended output.

Mostly, coversion costs represents the costs of all such activities or resources that have been applied in converting raw materials to finished items.

In mathematical or equation form conversion costs are forumalated as follows:

Conversion cost = Direct labour + Overheads (+ direct expenses)

Conversion costs includes only such kind of direct expenses that supported the conversion process or in absence of such expenses conversion would have not been possible.

Another important point to note in the equation above is that the term overheads means strictly manufacturing overheads. Usually the term overheads is used to mean admin and selling expenses also but in conversion costs only those overheads that were part of production process will be included.