Conversion costs definition. Analyzing the definition of key terms often provides more insight about concepts. Conversion costs can be defined as – Expenditures incurred in converting raw materials to finished goods; includes direct labor costs and overhead. Conversion cost is one way we can categorize the cost of production the costs of inventory, the costs needed to convert raw material to something useful. Inventory consists of raw material but a large part of what inventory is and costs are conversion costs. Direct labor is often a big factor in converting raw material to inventory. Indirect costs are generally included in overhead, overhead being a bucket for costs that will be included to inventory but are difficult to directly assign to specific units of inventory. Overhead costs could include most any cost on the factory, indirect labor, and indirect materials.
