1. What is Prime Cost?

Prime cost represents the direct costs attributable to the production of goods sold by a company. It includes the sum of direct materials and direct labor costs incurred during manufacturing.

2. How Does the Calculator Work?

The calculator uses the prime cost formula:

Where:

• \( \text{Direct Materials} \) — Raw materials directly used in production
• \( \text{Direct Labor} \) — Wages of employees directly involved in manufacturing

Explanation: Prime cost focuses only on direct, variable costs that can be directly traced to specific products or services.

3. Importance of Prime Cost Calculation

Details: Calculating prime cost is essential for determining product pricing, analyzing production efficiency, controlling manufacturing costs, and making informed business decisions about product lines.

4. Using the Calculator

Tips: Enter direct materials cost and direct labor cost in dollars. Both values must be non-negative numbers representing actual costs incurred.

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 the manufacturing process, such as assembly line workers, machine operators, and craftspeople.

Q3: How does prime cost differ from conversion cost?
A: Prime cost includes direct materials and direct labor, while conversion cost includes direct labor and manufacturing overhead (indirect costs of production).

Q4: Why is prime cost important for pricing decisions?
A: Prime cost represents the minimum price a company must charge to cover direct production costs, serving as a baseline for setting selling prices and determining profitability.

Q5: Are overhead costs included in prime cost?
A: No, prime cost excludes manufacturing overhead, administrative expenses, and other indirect costs that cannot be directly traced to specific products.