 Hello, in this lecture we will define conversion costs. According to fundamental accounting principles Wild 22nd edition, the definition of conversion costs is, expenditures incurred in converting raw materials to finished goods including direct labor costs and overhead. When considering conversion costs, we're often thinking about a manufacturing company, a company that will manufacture the inventory rather than just purchasing that inventory. We can group the costs related to the inventory in a few different ways. One of those ways could be the direct materials or material costs versus the conversion costs. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. For example, if we were making some type of tablet and we were making it from scratch, then we would have the direct materials, the materials that are included in this tablet and those could be metals, those could be plastic. Those are the things that we're going to take and somehow convert into the tablet. How are we going to convert the materials to the tablets? Those will be the conversion costs and those will typically be grouped in terms of the labor that's going to be included in that conversion process as well as the overhead. So anything that's related to the factory, the processing within the factory, anything that's in the practice factory, even the depreciation on the factory, even the maintenance of the factory, those are all components in overhead that are needed in order to convert the materials to the end product, the inventory, the tablets and therefore they should be in there in some type of way. So the groupings for inventory in the manufacturing and any inventory somewhere along the production process will be materials, the raw things in there and then a large component of that inventory includes the conversion costs, the things needed to make those materials into something we actually want and that's going to be the labor that's going to be the overhead.