Inventory conversion costs

Conversion costs include direct production labour and a systematic allocation of fixed and variable production overheads. Allocate variable overhead based on actual use of production facilities. Allocate fixed overhead systematically using normal capacity; unusually low output does not justify loading all idle capacity costs onto the few units produced. Selling and administrative costs generally do not form part of conversion. The allocation should reflect production activity and exclude amounts caused by abnormal waste.

Also called: Inventories costs of conversion