Conversion Cost Definition Formula Example

conversion cost formula

Conversion costs include direct labor and overhead expenses incurred as a result of the transformation of raw materials into finished products. Direct labor costs are the same as those used in prime cost calculations. The firm wants to figure out the conversion costs so they can adjust prices for next year.

  • Managers and other supervisors can use conversion costs to properly assess and track production costs.
  • A periodical review of the prime cost is crucial to ensure the efficiency of manufacturing process.
  • And it will increase your conversion rate and reduce the conversion cost.
  • Whatever product you use in your daily life from your toothbrush to your car was not created in this form from the beginning.
  • Both prime and conversion expenses, for example, will include direct labor costs in their estimates.
  • Overhead and direct labor are both included in conversion costs.

First of all, it’s to see which of your campaigns are successful. Identify your top converting landing page, and use the data to reallocate traffic to your highest converting pages. The overwhelming industry standard is to measure conversion rate on a weekly or monthly basis. At Proof, we track it on a trailing weekly basis — and that’s the right decision for our stage of business.


Every metric gives you a report card of your marketing campaign. Eventually, it means that every conversion out of this campaign costs you $50! But how conversion cost formula do you know if your conversion cost is suitable for your business? As a result, businesses need to be proactive in making changes at the right time.

For instance, the engine of a car and the spokes of a bicycle are included in direct material costs because they are each necessary to complete the production of that specific item. Total manufacturing costs are a combination of three factors – direct material, direct labor, and manufacturing overheads, while conversion costs do not include direct materials.

How to Calculate Cost per Conversion?

The prime cost figure is also helpful in setting the price at such a level that can easily generate enough profit for the company. Finally, we will be doing some exercises to deepen our understanding of conversion costs. In this article, we will be discussing what conversion costs are. For example, the raw materials for bread, which are typically eggs, flour, and yeast, don’t convert into bread on their own.

  • Their primary dissimilarity is that conversion costs relate more to costs of making raw materials become a product; prime costs concentrate on the disbursements of creating a complete product.
  • If it is more, then you want to rethink the marketing campaign in question.
  • Just keep in mind that you may not want to exclude keywords for brands you do not carry if you have successfully converted people with other brand loyalties in the past.
  • First of all, it’s to see which of your campaigns are successful.
  • At a $0.25 CPC, the campaign is profitable (and quite profitable with a 300% ROI).

In the case of inefficiencies, it helps redesign and reengineer the production. Abtin Bahramian is a game programmer who now concentrates on the web content area. Abtin loves to write beautiful content about digital marketing strategies. But, while not writing, he is probably learning some other languages, playing guitar, having fun with his friends, or most likely making video games. To run an A/B test, all you have to do is to set up two different variants of a page and split your traffic between them.

How to Calculate the Annualized Inventory Turn Rate

From there, you compare this to your average sales per conversion. If your cost per conversion is less than your sales per conversion, great. If it is more, then you want to rethink the marketing campaign in question.

conversion cost formula