Conversion cost is defined as the sum of all the costs which have been incurred in carrying out the conversion of an article into the intended output.
What is conversion cost all about?
In most of the cases and interpretation of the conversion costs, these are concerned mainly about the representation of conversion of costs. After that these costs will be representing the conversion of raw materials into finished product and items. In this way the conversion costs are all about the estimates development of the products formation form raw materials. Mathematical expressions define the conversion costs as being the sum of the cost of direct labor with the overheads including the direct expanses.
Inclusions of conversion costs
There are many important factors included in the conversion costs. The conversion costs involve the direct expanses in the business. These direct expanses also involve the ones which are supported in the process of conversion of materials from raw materials to finished products. In many cases the conversion costs also include the procedures of conversion of materials either in the presence or absence of the conversion expanses. Usually this is considered when the conversion of materials is not possible without provision of costs.
Overheads in conversion costs
There is another important aspect of the conversion costs ad it is linked with the overheads. Manufacturing overheads are strictly included in the conversion costs. Usually all the overheads are not included in the conversion costs and only those overheads which are made a direct part of the production procedure are included in this expenditure pattern. Usually the application of conversion costs is done on those finished good which are ready to be sold in the market. Therefore for applying the conversion costs, it is important to apply the expenditure of making and conversion of raw materials into finished goods.
This concept has been used since a long time in the cost accounting and its derivation related to value determination and ending inventory. Furthermore the conversion costs can also be used in determining the increasing cost of the product. Knowing the conversion cost is important because it will help in setting the price of a product.