Prime cost

What it means

The total of direct materials used, direct labour and any direct expenses in a manufacturing account.

Example

Direct materials RM20,000 + direct labour RM15,000 = prime cost RM35,000.

Why it matters

Prime cost is a key subtotal in a manufacturing account, before factory overheads are added.

In practice

Prime cost belongs in the manufacturing account, the extra statement a business that makes its own goods prepares before the income statement. It is the first subtotal. It is built from three parts. The first is direct materials consumed (opening raw materials plus purchases and carriage inwards, less closing raw materials). The others are direct labour and any direct expenses, such as royalties tied to each unit made. It is struck before any factory overheads are added.

Suppose a workshop uses RM12,000 of direct materials and RM8,000 of direct wages. The prime cost is RM20,000. Indirect factory costs are then added to reach the total factory cost of production.

Students often confuse prime cost with total production cost, also called factory cost. Prime cost captures only the direct costs that can be traced to each unit. Total production cost adds the indirect factory overheads, such as factory rent, supervisors' wages and machine depreciation, and adjusts for work in progress. A quick test is to ask whether a cost can be linked directly to a specific unit of output.

If manufacturing accounts look long and intimidating, one of our teachers can break one into small steps with you. Book a trial class.

Related terms

• Direct costs
• Overheads
• Work in progress
• Manufacturing account

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.4 Manufacturing accounts (page 17).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.