Prime cost includes Direct Material plus Direct Labor. Why do we call these two Prime Cost?  

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Raj Maurya
(@rajmaurya)
Member Admin
Joined: 2 years ago
Posts: 8
11/02/2019 3:26 pm  

Direct material cost and Direct labor cost are called Prime Cost because, these two are the main components of manufacturing cost in producing a good. Secondly, these two costs are directly attributable to production, because these are fully variable cost. Doubling of product (in units) will double the cost of direct material and direct labor, ceteris paribus. That is why, these two costs can be directly identified with production of a good.


Manufacturing overhead requires an allocation (spreading) of non-direct manufacuring costs. For example, if a machine is used in producing 3 different products, then total cost of operation of that machine will be allocated to the 3 products on some pre-determined allocation basis (for example, in proportion to the number of machine hours required, or in proportion of number of units of a product that the machine can produce in one hour). So, manufacturing costs are indirect costs allocated to production of a good and are not considered as prime cost.


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