Prime Cost


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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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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  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. Do dividends affect working capital?

    Regardless of whether cash dividends are paid or accrued, a company's working capital is reduced. When cash dividends are ... Read Full Answer >>
  5. Do prepayments provide working capital?

    Prepayments, or prepaid expenses, are typically included in the current assets on a company's balance sheet, as they represent ... Read Full Answer >>
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