Conversion cost
Conversion cost combines direct labour and manufacturing overhead — the total expense of converting raw materials into finished goods, with direct materials deliberately excluded.
Also known asconversion costs
See it move
A segmented bar shows conversion cost of €23 per unit broken into its two components: direct labour of €14 and manufacturing overhead of €9, illustrated using a ceramics production example. Conversion cost captures every cost of transforming raw materials into finished units — production wages and all manufacturing overhead — but excludes the cost of the direct materials being converted.
The formula
Variables
- direct labour cost (€)
- manufacturing overhead (€)
Represents the cost of transforming raw materials into finished goods, excluding the cost of the materials themselves.
Check yourself
A ceramics manufacturer incurs the following costs per unit: clay and glazing materials €9, kiln operators' wages €11, allocated factory rent €6, and packaging materials €3. What is the conversion cost per unit?