Q:

How do you calculate conversion costs?

A:

Quick Answer

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.

Continue Reading

Full Answer

  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.

Learn more about Financial Calculations

Related Questions

  • Q:

    What is total revenue-total cost approach?

    A:

    According to finance author and expert Tiffany C. Wright for AZ Central, total revenue-total cost is an accounting method often used by companies to maximize profits. This method assumes perfect competitive conditions and comprises all costs, including production and accounting-recognized costs.

    Full Answer >
    Filed Under:
  • Q:

    What is a home construction cost calculator?

    A:

    A home construction cost calculator is a calculator used to estimate the cost of constructing a new house. The calculator helps a person to determine how big the house, the kitchen and the rooms should be. It also asks a person what kind of finishing he wants around the house.

    Full Answer >
    Filed Under:
  • Q:

    How do you prepare an income statement?

    A:

    To prepare an income statement, first gather together sales and cost of goods sold data to determine business profits, and then gather the operating expenses. Once this information is presented in a table, subtract the total operating expenses from the profit to present the net income for the company.

    Full Answer >
    Filed Under:
  • Q:

    What is the Consumer Price Index?

    A:

    The Consumer Price Index is a statistic that measures the change in the cost of goods and services bought by households throughout the United States. It is calculated and published monthly by the Bureau of Labor Statistics, a division of the United States Department of Labor.

    Full Answer >
    Filed Under:

Explore