Conversion costs

Definition

Conversion costs are the combined costs of direct labor and manufacturing overhead incurred to transform raw materials into finished goods. These costs are crucial for determining the total production cost in manufacturing environments.

5 Must Know Facts For Your Next Test

1. Conversion costs include direct labor and manufacturing overhead, but not direct materials.
2. They are used in both job order costing and process costing systems.
3. Understanding conversion costs helps in budgeting and controlling production expenses.
4. In process costing, conversion costs are often accumulated by department.
5. Identifying conversion costs is essential for calculating the cost per unit of products.

Review Questions

• What components make up conversion costs?
• How do conversion costs differ from prime costs?
• Why are conversion costs important in process costing?

Related terms

Direct Labor:

Costs associated with workers who directly produce goods or services.

Manufacturing Overhead:

Indirect production costs that cannot be traced directly to specific units of product.

Prime Costs:

The sum of direct materials and direct labor incurred during production.