Legal Definitions - prime cost

Prime cost refers to the direct expenses a business incurs in producing a good or delivering a service. It specifically includes the cost of raw materials that are directly used in the production process and the wages paid to labor that is directly involved in creating the product or service. These are costs that can be directly and easily traced to the creation of a specific item or the delivery of a particular service.

• Example 1: Manufacturing a Custom Bicycle

  Imagine a small company that hand-builds custom bicycles. For each bicycle, the prime cost would include the expense of the specific frame, wheels, gears, handlebars, and other components purchased for that particular bike (direct materials). It would also include the wages paid to the skilled technician for the hours spent assembling, tuning, and testing that individual bicycle (direct labor). The rent for the workshop or the salary of the administrative assistant would not be part of the prime cost for that specific bicycle, as those are indirect costs.

• Example 2: Developing a Unique Online Course

  Consider an educational technology company creating a new, specialized online course. The prime cost for this course would encompass the fees paid to subject matter experts specifically hired to write the course content and record video lectures (direct labor). It might also include the cost of any unique software licenses or specific digital assets (like custom animations or stock footage) acquired solely for the development of that particular course (direct materials/expenses). General overhead like the company's internet bill or the CEO's salary would not be considered prime costs for this specific course.

• Example 3: Providing a Landscaping Service for a Client

  A landscaping company is hired to design and install a new garden for a homeowner. The prime cost for this project would include the expense of the specific plants, soil, mulch, pavers, and irrigation components purchased for that particular garden (direct materials). It would also cover the wages paid to the landscapers for the hours they spent on-site designing, planting, and installing the features of that specific garden (direct labor). The cost of the company's office supplies or the fuel for the truck used for general transport (not specific to this job's materials) would not be part of the prime cost for this particular landscaping project.