Prime Cost

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What is a 'Prime Cost'

A prime cost is a business expense for the materials and labor it uses in production. Prime cost is a way of measuring the total cost of the production inputs needed to create a given output. By analyzing its prime costs, a company can determine how much it must charge for its finished product in order to make a profit. By lowering its prime costs, a company can increase its profit margin and/or undercut its competitors' prices.

BREAKING DOWN 'Prime Cost'

For example, the prime costs for creating a can of soda would include raw materials such as the aluminum needed for the cans, ink to customize the cans with the product's brand name and logo, soda ingredients (i.e. carbonated water, caramel coloring, caffeine, sugar or aspartame and preservatives), freight charges to transport the raw materials to the manufacturing plant and the wages, taxes and benefits paid to or on behalf of the employees involved in the soda manufacturing process.

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RELATED FAQS
  1. Why is it important for a business to understand prime costs?

    Learn what constitutes prime costs for businesses, and discover why companies need to understand prime costs in business ... Read Answer >>
  2. What are some examples of prime cost items?

    Learn about prime cost, including the definition of raw materials and direct labor, and how the types of expenses included ... Read Answer >>
  3. What should ordinary borrowers know about the prime rate?

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  6. On which financial statement does a company list its raw material costs?

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