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.

2. How Does the Calculator Work?

The calculator uses the Prime Cost formula:

Where:

• Direct Materials — Raw materials that become an integral part of the product
• Direct Labor — Wages paid to workers directly involved in production

Explanation: This calculation helps businesses understand their direct production costs before accounting for overhead expenses.

3. Importance of Prime Cost Calculation

Details: Prime cost is crucial for determining product pricing, calculating gross margin, and analyzing production efficiency. It helps businesses identify cost-saving opportunities in their production processes.

4. Using the Calculator

Tips: Enter direct materials and direct labor costs in USD. Both values must be non-negative numbers. The calculator will sum these values to provide the prime cost.

5. Frequently Asked Questions (FAQ)

Q1: What's included in direct materials?
A: Direct materials include all raw materials that are directly used in the production of goods and can be directly traced to the finished product.

Q2: What's included in direct labor?
A: Direct labor includes wages for employees who are directly involved in manufacturing products, such as assembly line workers.

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.

Q4: Why is prime cost important for pricing?
A: Prime cost represents the minimum price a product must be sold at to cover direct production costs, helping businesses set profitable prices.

Q5: How often should prime cost be calculated?
A: Businesses should track prime cost regularly (monthly or quarterly) to monitor production efficiency and cost trends.