ECONOMICS

Detailed explanation-1: -Conversion costs include the manufacturing costs that are needed to convert direct materials into final products: direct labor costs and manufacturing overhead costs.

Detailed explanation-2: -Conversion cost includes, cost of raw material, direct labour and factory overheads. This is the process of converting the raw material in to finished goods.

Detailed explanation-3: -Conversion costs are used in the generation of a manufacturing firm’s income statement and balance sheet if process costing is used as well as assist in product pricing. Raw materials are not included in conversion costs but are included in prime costs, which are direct materials and direct labor.

Detailed explanation-4: -The cost involved in converting raw material into finished goods is called ‘conversion cost. ‘ The expenditure made on direct labor and manufacturing overheads makes up the total conversion cost of the production. Overhead and Direct labor are two out of three ‘elements of cost.

Detailed explanation-5: -Comparing Prime Costs and Conversion Costs Thus, the essential difference is that prime costs do not include the factory overhead costs that are included in conversion costs, while conversion costs do not include the direct material costs that are included in prime costs.