Question

Conversion cost formula and examples

Answer 1

Conversion costs are the costs that are incurred by processing and manufacturing entities when transforming raw materials into finished products.

To compute conversion costs we take the direct labor costs plus any manufacturing overheads required to transform raw materials into completely finished goods.

Therefore to obtain the conversion costs we take all direct labor and we add to the total manufacturing overheads that a company has incurred in transforming it's raw materials into finished products.

Therefore Total conversion costs are given by:-

Conversion costs =Direct labour + Manufacturing overheads.

Examples

Company A incurred the following costs during the production period:

Direct labor expenses: $5,000

Depreciation on machinery: $600

Insurance expenses: $1,200

Maintenance expenses: $600

Electricity: $1400

Based on the costs are provided above, calculate the conversion of Company A.

The conversion cost for company A will be:

= Direct labor + maintenance expenses + insurance expenses + electricity

=$5000+ $600+ $1200+ $600+ $1400

Conversion costs = $8800