Cost of Inventories Costs of Conversion
The costs of conversion of inventories include costs directly related to the units of
production, such as direct labour. They also include a systematic allocation of fixed
and variable production overheads that are incurred in converting materials into
finished goods. Fixed production overheads are those indirect costs of production that
remain relatively constant regardless of the volume of production, such as depreciation
and maintenance of factory buildings and equipment, and the cost of factory
management and administration. Variable production overheads are those indirect
costs of production that vary directly, or nearly directly, with the volume of
production, such as indirect materials and indirect labour.