Question

What is the different betwen prime cost and conversion cost

Answer 1

Prime Costs

Prime costs refer to the total cost of direct materials and direct labor. They are the total amount of expenses that are directly tied to making a specific product. Direct materials pertain to cost of items that form an integral or major part of the finished product. Examples are steel in automobiles, rubber in tires, fabric in clothing, etc. Direct labor refers to the salaries and wages of workers who transform the materials into finished goods. Your prime costs are the expenses that are required to make your products. Without the materials or labour, you would not have goods to sell. You should monitor your prime costs and try to reduce them by lowering what you pay. You will not be able to eliminate these types of expenses, so your strategy should be to pay less for materials or improve operations to use less.

Conversion Costs

Conversion costs are your expenses that turn raw materials into finished goods. It is the sum of labour and overhead costs that go into making your products. Your labour costs are the compensation needed to make your products. Overhead costs are your expenses that do not directly relate to any single product. Utilities or rent are overhead expenses, because they’re necessary to make your products but dont actually contribute to the final product. Refers to costs incurred in production other than direct materials and direct labor.

Factory overhead includes indirect materials (such as nails, staples, adhesives, etc.), indirect labor (such supervisor's salary), and factory expenses (factory supplies, utilities, depreciation, and all other expenses incurred in the factory).Your company should focus on minimizing conversion costs whenever possible. Unlike prime costs, conversion costs are somewhat avoidable because they aren’t related to your actual inventory. While some conversion costs are unavoidable, you should try to reduce what you pay in overhead because these are just the costs to run your business.