Prime Cost

Prime cost is the sum of direct materials costs and direct labor costs.

In most production processes, prime costs are the primary production costs and make up the bulk of the total manufacturing costs. All of the prime costs are direct costs.

Formula

Prime Costs = Direct Materials Costs + Direct Labor Costs

Example

Green Fuels is engaged in production of biofuels. At the start of financial year 2012, the company had a raw material inventory of $10 million. During the year it purchased $320 million of raw material. The raw material inventory at the end of 2012 amounted to $50 million. Out of the raw materials consumed $100 million went to manufacturing overheads. The company's total labor costs are $300 million. 20% of the labor is indirect. Find prime costs.

Raw materials consumed = opening raw materials ($10 million) + purchases ($320 million) − ($50 million) = $280 million

Direct materials consumed = raw materials consumed ($280 million) − indirect materials ($100 million) = $180 million

Direct labor costs = 80% of $300 million = $240 million

Prime costs = $180 million + $240 million = $420 million

Written by Obaidullah Jan