What is prime cost?

What is prime cost?

• A. Costs associated with the production of a specific cost unit
• B. Only material costs
• C. All costs including overheads and admin
• D. Only labour costs

Answer: (A)

Prime cost consists of the direct costs that can be traced straight to producing a product: direct materials and direct labour. These are the costs that can be assigned to a specific cost unit without allocating overheads. That’s why the correct description matches “costs associated with the production of a specific cost unit.” It excludes overheads and indirect expenses, which is why statements including these or omitting either materials or labour are not prime cost. For example, making a chair would include the wood and the carpenter’s wages, but not factory rent or admin salaries.

Prime cost consists of the direct costs that can be traced straight to producing a product: direct materials and direct labour. These are the costs that can be assigned to a specific cost unit without allocating overheads. That’s why the correct description matches “costs associated with the production of a specific cost unit.” It excludes overheads and indirect expenses, which is why statements including these or omitting either materials or labour are not prime cost. For example, making a chair would include the wood and the carpenter’s wages, but not factory rent or admin salaries.