Q:

How do you calculate conversion costs?

A:

Calculate conversion cost by adding together labor and manufacturing costs. Conversion costs include all costs except the direct cost of the raw materials. Labor and manufacturing costs can include anything from salaries to rent to regulatory inspections. Only include costs incurred directly during the manufacturing of the product.

  1. Add up labor costs

    While labor costs primarily include worker wages, they also include benefits, payroll taxes, workers' compensation insurance, pension matching obligations and any other company-specific costs. Divide these costs to proportionally represent the amount of worker time spent on the particular product for which the conversion cost is being calculated.

  2. Add up manufacturing overhead

    Most of the costs considered in calculating the conversion cost come from manufacturing overhead. When calculating the overhead costs, exclude temporary costs, such as the cost of producing a preliminary design, that are not representative of day-to-day costs. Manufacturing overhead commonly includes equipment maintenance, rent, insurance, manufacturing supplies, production supervision, property taxes, equipment depreciation and the salaries of non-manufacturing workers, in addition to other costs. Divide these costs by the proportion of time spent on the project in question.

  3. Determine the cost per unit

    After adding up all the direct labor costs and manufacturing overhead, calculate the cost per unit by dividing the conversion cost by the number of complete units produced over the same time period.


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