Prime costs

Definition

Prime costs are the direct costs of production, which include direct materials and direct labor. These costs are directly attributable to the manufacturing process and are essential for producing goods.

5 Must Know Facts For Your Next Test

1. Prime costs consist of direct materials and direct labor.
2. They do not include manufacturing overhead or indirect costs.
3. Prime costs are used in calculating the cost of goods manufactured (COGM).
4. Understanding prime costs is crucial for accurately pricing products and controlling production expenses.
5. In managerial accounting, prime costs help in assessing the efficiency of the production process.

Review Questions

• What two components make up prime costs?
• Why are prime costs important in managerial accounting?
• How do prime costs differ from manufacturing overhead?

Related terms

Direct Materials:

Raw materials that can be directly traced to the finished product.

Direct Labor:

Wages paid to workers who can be directly associated with specific units of production.

Manufacturing Overhead:

Indirect factory-related costs that are incurred when a product is manufactured but cannot be traced directly to specific products.