It means all the costs that a company incurs in its production process for converting raw materials into finished goods. There can be two situations, either the complete conversion process -raw materials to finished goods happens within the factory itself. Or the raw materials move out to another factory for the purpose of conversion. The conversion cost calculator considers all the costs up to the level of manufacturing cost or production cost. But this does not include the cost of materials. Because the concept of conversion cost says that all the costs incurred in the process of converting raw material into finished goods hence, it is not a part of the process, and it is the next level of costs. Raw materials are the products on which the processing happens.
We add up the cost of direct labor and manufacturing overheads in order to calculate conversion cost. Mathematical representation of same is as follows:
Conversion Cost = Direct Labor Cost + Manufacturing Overheads
One more way to calculate conversion cost is by deducting the amount of direct material from the total manufacturing cost. A representation of the same is as follows:
Conversion Cost = Total Manufacturing Cost – Direct Material
Conversion Cost Calculator
How to Calculate using Calculator?
The conversion cost calculator requires the following two variables to be entered into it.
Direct Labor Cost – It is the cost that can be directly attributed to the products. It includes payments made to workers or employees directly engaged in producing such goods.
Manufacturing Overheads – All the indirect expenses incurred in the processing of raw materials into finished goods that one cannot assign directly to such finished goods produced comprise manufacturing overheads. These include rent of factory building, depreciation of assets engaged in the production process, power & fuel, etc.