What are conversion costs?
Conversion costs are a term used in more than one financial application. This term may apply to the total cost of production and labor costs associated with product production. Conversion costs may also apply to the amount that is spent on re -organizing the device used in the production process, which perhaps converts an older process into a more efficient process. In investment situations, this term may apply to the expenses that arise in the transfer of investment or transferred to another investment.
In connection with the production of goods and services, the cost of conversion includes all measurable types of expenditures that allow the production of products suitable for selling to consumers. In this scenario, the costs would include the wages of those who are actively involved in this process, any type of direct production costs and production overheads that apply to the general operation of the equipment. The concept of the flow of flows are closely tied to the cost of conversion and in some quarterH These two terms are used interchangeably.
When reworking the production floor by moving or equipment to a new sequence, any movement costs are marked as transfer costs. For example, if the distribution of the production plant is redesigned to combine the activities of two previously independent departments into a single work unit, the cost of dismantling old machines and its settings in a new configuration, and assigning responsibilities to workers in the reworked department would be charged back to the conversion process. Similarly, the loss caused by the temporary shutdown of both departments, while transforming, can also be considered as part of the total conversion costs.
businesses often monitor conversion costs very carefully. Since the cost of this type has an impact on the amount of profits obtained from each unit sold, it is necessary to ensure that the expenses are justified and adequate.In the event that one of the costs is considered exaggerated, steps to minimize these costs will lead to a greater potential profit of earnings, provided that the change does not have a negative impact on the quality of the products produced.
Even when investing, conversion costs are. This may include rolling one asset to another form, such as moving the pension fund balance to a mutual fund or convert one class of shares to another class. All costs that are generated as a result of these measures may be classified as conversion costs and in some cases used as a tax deduction if the activity is considered an admissible deduction by the relevant government income agency.