Prime Cost

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DEFINITION of 'Prime Cost'

A business's expenses 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.

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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?

    In managerial accounting, prime cost is the sum of direct costs needed to make a product and includes direct materials, direct ... Read Full Answer >>
  2. What is the difference between prime cost and conversion cost?

    Prime costs and conversion costs are relied upon heavily in the manufacturing sector as a metric to determine efficiency ... Read Full Answer >>
  3. Why is it important for a business to understand prime costs?

    Prime costs are defined as the direct expenses associated with producing a product or service and are most commonly referenced ... Read Full Answer >>
  4. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  5. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
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