Question

Prime Cost includes only ...................... Cost.

Answer 1

1. Prime costs are the costs directly incurred to create a product or service.
2. These costs are useful for determining the contribution margin of a product or service, as well as for calculating the absolute minimum price at which a product should be sold.
3. However, since prime costs do not include overhead costs, they are not good for calculating prices that will ensure long-term profitability.

Examples of prime costs are:

Direct material :-

• This is the raw materials used to construct a product.
• This may also include supplies consumed during the production of individual units, if such an association can be established.

Piece rate pay.

• This is the cost of labor and related payroll taxes directly associated with the production of one additional unit.
• It does not include other types of labor, such as manning an assembly line, if such labor cannot be clearly associated with the production of individual units.

Service labor.

• This is the cost of billed labor, such as the cost of consulting labor billed to a client.

Commission.

If there is a salesperson commission associated with a specific sale, then that is a prime cost.