[go: up one dir, main page]
Scribd
Upload
996 views2 pages

Conversion Cost

Conversion cost refers to the sum of direct labor costs and manufacturing overhead costs. It represents the costs involved in converting raw materials into finished goods. For example, a company had direct labor of $40,000, rent of $8,000 and depreciation of $6,000 to produce 20,000 units. The conversion cost per unit was calculated as $40,000 + $8,000 + $6,000 divided by 20,000 units, which equals $2.70 per unit.

Uploaded by

fas4106
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
996 views2 pages

Conversion Cost

Conversion cost refers to the sum of direct labor costs and manufacturing overhead costs. It represents the costs involved in converting raw materials into finished goods. For example, a company had direct labor of $40,000, rent of $8,000 and depreciation of $6,000 to produce 20,000 units. The conversion cost per unit was calculated as $40,000 + $8,000 + $6,000 divided by 20,000 units, which equals $2.70 per unit.

Uploaded by

fas4106
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 2

Conversion cost Direct labor refers to the time spent by individuals who work specifically on manufacturing a product or performing

a service. Any factory or production cost that is indirect to the product or service and, accordingly, does not include direct material and direct labor is overhead. This cost element includes factory supervisors salaries, depreciation on the machines producing plastic food storage bags, and insurance on the production facilities. The sum of direct labor and overhead costs is referred to as conversion cost. In an equation form it is represented as Conversion Cost = Direct Labor Cost + Manufacturing Overhead Cost The conversion cost includes both the direct and indirect expenditure incurred in converting a currency, material, or security from one form or type into another. The conversion cost also includes the cost of moving from one kind of equipment or production process to another. These costs are high when converting from a manual system to a computerized system. For example it includes the cost of new equipment plus training. When overhead is applied on a direct labor basis, or when direct labor and overhead are added to the product at the same rate, a single percentage of completion estimates can be made and used for both conversion cost components. Let us take an example. Company XYZ had the following costs related to producing 20,000 units of its product. Direct materials $90,000 Direct labor 40,000 Rent 8,000 Depreciation 6,000 Conversion cost per unit = direct labor + rent + depreciation / no. of units produced thus, conversion per unit = $ 40,000 + 8,000 + 6,000 / 20,000 = $ 2.70 The direct materials and direct labor maybe combined into another classification called prime cost. Direct labor and factory overhead (which includes rent and depreciation) may be combined into a classification called conversion cost, which represents the cost of converting direct materials into finished products. Questions

What is a conversion cost? With a help of an example explain how the conversion cost is calculated?

Conversion Cost Definition:


Conversion cost is equal to direct labor cost plus manufacturing overhead cost.

In equation form: Conversion Cost = Direct Labor Cost + Manufacturing Overhead Cost

You might also like