1. What is Prime Cost?

Prime Cost represents the total direct production cost of goods manufactured, including direct materials and direct labor costs. It is a fundamental metric in cost accounting that helps businesses determine the basic production costs before overhead expenses.

2. How Does the Calculator Work?

The calculator uses the Prime Cost formula:

Where:

• Direct Materials — Raw materials directly used in production
• Direct Labor — Wages of employees directly involved in production

Explanation: Prime cost focuses only on costs that can be directly traced to specific products, excluding indirect costs like factory overhead, administrative expenses, and selling costs.

3. Importance of Prime Cost Calculation

Details: Calculating prime cost is essential for pricing decisions, cost control, profitability analysis, and identifying areas for cost reduction. It helps manufacturers understand their basic production costs and set appropriate selling prices.

4. Using the Calculator

Tips: Enter direct materials cost and direct labor cost in dollars. Both values must be non-negative numbers. The calculator will automatically compute the total prime cost.

5. Frequently Asked Questions (FAQ)

Q1: What is included in direct materials?
A: Direct materials include all raw materials and components that become an integral part of the finished product and can be directly traced to it.

Q2: What constitutes direct labor?
A: Direct labor includes wages of workers who are directly involved in manufacturing the product, such as assembly line workers, machine operators, and quality control inspectors on the production floor.

Q3: How is prime cost different from conversion cost?
A: Prime cost includes direct materials and direct labor, while conversion cost includes direct labor and manufacturing overhead (the cost to convert raw materials into finished goods).

Q4: Why is prime cost important for pricing?
A: Prime cost represents the minimum price a company must charge to cover direct production costs. Selling below prime cost means losing money on each unit sold.

Q5: Can prime cost be used for service businesses?
A: While primarily for manufacturing, service businesses can adapt the concept by considering direct labor and any direct materials used in providing services.