Definition of 'Prime Cost'
The formula for prime cost is:
Prime Cost = Direct Materials + Direct Labor + Overhead
Direct materials are the raw materials that are used to produce a product. Direct labor is the cost of the labor that is directly involved in the production of a product. Overhead is the cost of all other expenses that are incurred in the production of a product, such as rent, utilities, and insurance.
Prime cost is an important concept in cost accounting because it is used to calculate the cost of goods sold (COGS). COGS is the cost of the goods that a company sells. It is calculated by adding the cost of the goods that are sold during the period to the beginning inventory of goods and subtracting the ending inventory of goods.
The cost of goods sold is an important figure for a company because it is used to calculate the gross profit. Gross profit is the difference between the sales revenue and the cost of goods sold. Gross profit is an important measure of a company's profitability.
Prime cost is also an important concept in financial analysis. It can be used to compare the profitability of different products or services. It can also be used to compare the profitability of different companies.
In conclusion, prime cost is an important concept in cost accounting and financial analysis. It is used to calculate the cost of goods sold and the gross profit. It can also be used to compare the profitability of different products, services, and companies.
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