Conversion cost
Direct labor cost plus manufacturing overhead cost.
Conversion costs refer to the cost of converting raw materials into finished goods. These costs include direct labor and manufacturing overheads and exclude the cost of raw materials.
More specifically, conversion costs are the sum of direct labor costs and manufacturing overhead costs incurred in the production of a particular product. Direct labor costs include wages, salaries, and other expenses paid directly to the employees involved in the production process. Manufacturing overhead costs include indirect labor costs (e.g., supervisors’ salaries), indirect material costs (e.g., lubricating oil for machinery), and other indirect manufacturing costs (e.g., maintenance, repairs, and utilities).
The calculation of conversion cost is important for manufacturers because it helps them determine the total cost of production and evaluate their pricing strategies. By understanding their conversion costs, manufacturers can better understand their profit margins, identify inefficiencies in their production process, and make adjustments accordingly.
More Answers:
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