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Prime Cost in Accounting: Definition & Formula

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  • 0:00 Prime Cost
  • 0:28 The Formula Breakdown
  • 1:15 Applying Numbers to…
  • 2:27 Why Does Prime Cost Matter?
  • 3:46 Lesson Summary
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Lesson Transcript
Instructor: Toni Bonton

Toni has taught personal finance and is currently pursuing a doctorate in business administration.

Prime costs represents the total costs directly involved in manufacturing a product. This lesson breaks down the components of prime costs, its formula, and how it is used.

Prime Cost

Mia is an up-and-coming fashion designer. After being featured in a community fashion show, Mia received a large order from a local boutique for some of her pieces. Due to the size of the order, Mia knows that she will have to buy extra fabric and hire outside help.

The business expense of purchasing materials and paying laborers to actually manufacture the product are the direct costs that add up to the prime cost.

The Formula Breakdown

Calculating the prime cost is fairly simple. Just add the cost of raw materials together with the cost of direct labor, and viola, you have the prime cost:

Prime Cost = Raw Materials + Direct Labor

The boutique ordered 25 skirts, 35 blouses, and 50 dresses. To fill the order, Mia heads to the fabric store to purchase material to fill the order. This cost is the raw materials cost, as fabric will be needed to make the pieces for the boutique's order. Mia also recruits her two best friends, Lisa and Nadia, and agrees to pay them each $30 an hour for their help in sewing each piece. This is a direct labor cost because Lisa and Nadia will be working directly with the materials purchased to create the pieces needed to satisfy the boutique's order.

Now, let's crunch some numbers!

Applying Numbers to the Formula

PC_Formula

Mia spent $500 on the fabric needed to make all 25 skirts, and it takes the ladies five hours to finish them. The prime cost would equal $650.

Prime Cost = ($500) + ($30 * 5)

PC = $500 + $150

PC = $650

After spending $750 on material and ten hours of labor to make the 35 blouses, what is the prime cost?

Prime Cost = ($750) + ($30 * 10)

PC = $750 + $300

PC = $1,050

The prime cost for 35 blouses is $1,050.

Finally, Mia spends $1,250 to purchase enough material to make 50 dresses, and it takes Mia, Lisa, and Nadia a total of 25 hours to complete them all.

Prime Cost = ($1,250) + ($30 * 25)

PC = $1,250 + $750

PC = $2,000

The prime cost for 50 dresses is $2,000.

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