Calculate conversion cost, cost per unit, equivalent units, and overhead applied from direct labor and manufacturing overhead inputs for jobs and WIP.
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Conversion Cost Formula
The following formula is used to calculate a conversion cost.
- Where CC is the conversion cost ($)
- DL is the direct labor cost ($)
- MO is the manufacturing overhead ($)
To calculate a conversion cost, add together the direct labor cost and the manufacturing overhead.
Conversion Cost Definition
Conversion cost is direct labor plus manufacturing overhead used to convert raw material into a manufactured good; it excludes direct materials.
Conversion Cost Example
How to calculate conversion cost?
- First, determine the direct labor cost.
This will be the cost of any labor that was directly involved in the process of manufacturing the good.
- Next, determine the total manufacturing overhead.
The manufacturing overhead will be the total overhead cost required for the manufacturing process to occur and the good to be produced.
- Finally, calculate the conversion cost.
Calculate the conversion cost by adding the direct labor cost to the manufacturing overhead.
FAQ
Conversion cost is direct labor plus manufacturing overhead used to convert raw material into a completed good; it excludes direct materials.
The best methods for reducing conversion costs involve improving efficiency to reduce both direct labor and manufacturing overhead.
