What is prime cost?

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Prime cost is a sum of all the direct costs i.e. prime cost is the aggregate of all such costs that can be traced back to products (cost units) or cost centers.

Thus prime cost means sum of direct material costs, direct labour costs and direct expenses.

Direct material costs include cost incurred on material bought with an intention to be sold after conversion or such material that will be used in manufacturing or provision of services AND the costs on such materials can be traced back to the product or service or cost centers.

Direct labour costs mean such costs that is incurred on such employees who were directly involved in the conversion process or provision of services.

All such expenses which cannot categorized as direct material or direct labour but still such expenses can be traced back to particular cost unit or cost center are termed as direct expenses. Usually these are the expenses incurred for such items, services, activities or anything which were used in production of a particular product or provision of services e.g. construction plan of one house, royalties etc.

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