Which costs make up prime cost?

Which costs make up prime cost?

• A. Direct materials and direct labor.
• B. Direct materials and manufacturing overhead.
• C. Direct labor and fixed overhead.
• D. Manufacturing overhead and indirect labor.

Answer: (A)

Prime costs are the direct, traceable costs of producing a product. They include direct materials—the raw inputs that become part of the finished product—and direct labor—the wages of workers who directly transform materials into the product. Manufacturing overhead covers indirect materials, indirect labor, and other overhead costs that cannot be tied to a specific unit, so it’s not part of prime cost. Therefore, the prime cost consists of direct materials and direct labor. Including overhead—or using fixed overhead alone—adds costs that aren’t directly tied to the production of a specific unit, so those do not fit prime cost.

Prime costs are the direct, traceable costs of producing a product. They include direct materials—the raw inputs that become part of the finished product—and direct labor—the wages of workers who directly transform materials into the product. Manufacturing overhead covers indirect materials, indirect labor, and other overhead costs that cannot be tied to a specific unit, so it’s not part of prime cost.

Therefore, the prime cost consists of direct materials and direct labor. Including overhead—or using fixed overhead alone—adds costs that aren’t directly tied to the production of a specific unit, so those do not fit prime cost.