How to Calculate Conversion Costs

Written by lisa nelson
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How to Calculate Conversion Costs
Calculating conversion costs is a simple process. (Jupiterimages/Comstock/Getty Images)

Calculating business conversion costs is a very important part of accounting. If the conversion cost is not known, it can be difficult to make optimal decisions. For example, a business might be manufacturing a product for a seemingly reasonable price while, in reality, the cost of the raw materials is very low and the conversion cost is overpriced. This would create the illusion of a fair price when, in actuality, there is plenty of money to be saved. The process of calculating conversion costs is quite simple and can be learnt very easily.

Skill level:
Easy

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Things you need

  • Calculator or pen and paper

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Instructions

  1. 1

    Understand what, exactly, conversion costs are. In accounting, the conversion cost of a product is the cost of direct labour combined with the manufacturing overhead. Direct labour costs are the sum of the costs paid to those who directly work on the products. Manufacturing overhead includes indirect materials, indirect labour and any other indirect costs.

  2. 2

    Make a list of all the costs associated with direct labour and manufacturing overhead. If you are not sure what some of your costs are, you can estimate them.

  3. 3

    Using either a calculator or a pen and paper, add up all the costs that you listed. The result is the sum of your conversion costs.

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