Understanding Prime Cost: Key Components Explained
Discover what prime cost entails and its significance in production, including direct materials and labor costs.
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Prime cost includes the direct expenses required to produce a product or service. This typically encompasses direct materials (raw materials) and direct labor (wages for workers involved in production). Prime cost focuses on elements easily attributable to the manufacturing process.
FAQs & Answers
- What are the components of prime cost? Prime cost includes direct materials and direct labor costs related to the production of goods.
- Why is prime cost important in manufacturing? Prime cost helps businesses understand their direct production costs, which is essential for pricing strategies and profitability analysis.
- How can prime cost be reduced? Reducing prime cost can be achieved through negotiating better material prices, improving labor efficiency, and optimizing production processes.
- What is the difference between prime cost and total cost? Prime cost only accounts for direct costs involved in production, while total cost includes both direct and indirect expenses.