# What is Conversion Cost Formula & Examples How to Calculate Conversion Costs?

Hence, using conversion costs is an efficient way of calculating equivalent units and per unit costs rather than separately calculating direct labor and manufacturing overheads. It is the direct labor plus any manufacturing overheads needed to convert raw materials into a finished product. Conversion costs are also used as a measure to gauge the efficiencies in production processes but take into account the overhead expenses left out of prime cost calculations. Operations managers also use conversion costs to determine where there may be waste within the manufacturing process.

Prime costs refer to all the direct expenses related to producing a finished product. Prime costs include direct material costs and direct labor costs. So direct labor costs appear commonly in both prime costs and conversion costs. In cost accounting, conversion costs are all the costs incurred to convert raw materials into a finished good. Conversion costs include direct labor and manufacturing overhead.

## Conversion Rate Optimization (CRO): How to Improve Conversions

The ability to calculate the cost per conversion for your firm presents another question, how much should you actually pay for each conversion? Frankly, there’s no clear answer to this question, and there are many variables that determine how much can be spent for each conversion. Let us assume that the firm invested \$55000 for their online marketing campaign and managed to convert a total of 1200 customers. Now, the formula for calculating the Cost per Conversion has been stated earlier as (Total expense incurred for the marketing campaign) / (Total conversions gained).

To do so, visit the tab called “Search terms” to see what searches result in showing your ads. Try adding some of these keywords if they are not already in your campaign. https://www.bookstime.com/ It is rudimentary to gauge the value of closing inventory since it is a line item reported on both the income statement and the company’s balance sheet.

## Conversion Cost Example

Note that the spend we are talking about is the marketing spend. Also, this cost is commonly referred to as cost per conversion (CPC). As a result, businesses need to be proactive in making changes at the right time. Only expenditures directly connected to employees who participated in the development of final items are included indirect labor costs. Managers and other supervisors can use conversion costs to properly assess and track production costs. Conversion costs may also be used to build market based pricing models for items and to estimate the final worth of finished goods.