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. What is prime cost in managerial accounting?

    Learn about prime costs in managerial accounting such as direct material cost, labor and wages cost, and other direct costs ... Read Answer >>
  2. 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 >>
  3. What is the difference between prime cost and conversion cost?

    Understand the difference between prime costs and conversion costs, and learn how each type is used in analyzing business ... Read Answer >>
  4. What is the prime cost formula?

    Learn about the prime cost formula and how to determine which costs are included in this calculation, including the difference ... Read Answer >>
  5. How can I calculate prime costs?

    Learn about the prime cost formula and how to determine which production expenses are included in the calculation of the ... Read Answer >>
  6. What are some examples of prime cost items?

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