Prime Cost
The sum of direct materials and direct labor costs — the two cost components that can be directly traced to a specific unit of production.
What is Prime Cost?
Prime cost is the total of direct materials and direct labor — the two primary cost elements that are directly and conveniently traceable to individual products. Unlike manufacturing overhead, both components of prime cost require no allocation; they attach directly to each unit produced. Prime cost is a subset of total product cost and is used in pricing analysis, profitability assessment, and performance evaluation. Tracking prime cost separately from overhead helps managers understand the efficiency of direct production inputs and identify opportunities to reduce the most controllable portion of product cost.
Example
A shoe manufacturer uses $12 of leather and materials (direct materials) and $8 of cobbler wages (direct labor) for each pair of shoes. The prime cost is $12 + $8 = $20 per pair. Manufacturing overhead (factory rent, utilities, equipment depreciation) is added separately. If the shoe sells for $60, the gross margin analysis begins with this $20 prime cost baseline.