Conversion Cost
Accounting glossary · Understand, connect, apply
Conversion cost is the cost of turning materials into finished output, conventionally measured as direct labour plus manufacturing overhead. It is often used in process-costing calculations.
Example
A department incurs direct labour of 4,000 and manufacturing overhead of 6,500. Conversion cost is 10,500, excluding direct materials.
Formula and assumptions
Conversion cost = direct labour + manufacturing overhead
Remember the difference
Materials and conversion may have different completion percentages in work in process. Do not assume that a unit receiving all its materials is also fully converted.
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Published 4 November 2026. Prepared with AI assistance; examples are fictional and simplified for learning.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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