What is Prime Cost?

What is Prime Cost?

• A. Sum of direct materials, direct labour and direct expenses
• B. Sum of direct materials and indirect overheads
• C. Sum of variable costs
• D. Sum of all production costs

Answer: (A)

Prime cost refers to the costs that can be directly traced to making a product. It includes direct materials, direct labour and any direct expenses incurred specifically for production. That is why the correct option is the sum of direct materials, direct labour and direct expenses. Indirect overheads are excluded because they relate to the factory as a whole, not to a single product. Prime cost also isn’t the same as total production cost (which would include overheads) or merely the sum of variable costs, since some direct costs can be fixed as well.

Prime cost refers to the costs that can be directly traced to making a product. It includes direct materials, direct labour and any direct expenses incurred specifically for production. That is why the correct option is the sum of direct materials, direct labour and direct expenses. Indirect overheads are excluded because they relate to the factory as a whole, not to a single product. Prime cost also isn’t the same as total production cost (which would include overheads) or merely the sum of variable costs, since some direct costs can be fixed as well.