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The Question:      What are Prime Costs?

Answer: Financial speak

Prime costs = materials + labor

Prime cost is a GAAP (Generally Accepted Accounting Principles) term that refers to the costs of all materials plus the labor needed to create your product.  They are called prime because of the effect they have on profitability.  They are the “primary” contributors to your profits.

In many circles this may be referred to as “Controllable or Variable Costs”, because you have the greatest flexibility to control your profit with them.  The organization controls what you pay your labor and you can work with vendors around pricing of materials.  Most other costs in this scenario would be deemed “Non Controllable Costs”, such as rent, taxes, or utilities.  Some argue that rent is negotiable, therefore controllable, once it is agreed upon it doesn’t change unless negotiated again and therefore it is considered a non controllable.

Many industries break down the label of “materials” to other labels or set formulas specific to that industry.  But “Prime costs”  will always be cost of necessary materials(or services) and labor in the end.

For example;

Prime costs in a manufacturing business may include a distribution channel cost because of the costs associated with marketing it, the marketing is necessary to the distribution of that particular product and with out those costs the product would not get to market.  It is essential yet controllable, so it is a prime cost.

OR

Prime costs in the restaurant industry are known as the “Big 3” Food, Labor, and Liquor”, while there are other controllable costs these are the 3 that have the most effect on profits.

and so on…..

Carpe diem!

 

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