What are conversion costs?

Definition of Conversion Costs

Conversion costs is a term used in cost accounting that represents the combination of direct labor costs and manufacturing overhead costs. In other words, conversion costs are a manufacturer's product or production costs other than the cost of a product's direct materials.

Expressed another way, conversion costs are the manufacturing or production costs necessary to convert raw materials into products.

The term conversion costs often appears in the calculation of the cost of an equivalent unit in a process costing system.

Examples of Conversion Costs

An example of direct labor are the employees working on the assembly line of a manufacturer.

Examples of manufacturing overhead include the utilities, indirect labor, repairs and maintenance, depreciation, etc. that is occurring within a company's manufacturing facilities.