How to calculate prime cost :

It is the direct cost of production incurred during a given period of time. Prime cost is also known as direct cost, flat cost or first cost

Prime Cost Formula :

The formula for the prime cost is simply expressed as a summation of raw material cost and direct labor cost incurred during the given period of time.

Prime Cost = Total Raw Materials Cost + Direct Labout Cost

For example, assume a business manufactures 10 chairs and incurs the following expenses:

$5000 for oak wood

$1500 for hardware

50 hours of labor for product assembly at a rate of $15 per hour

Only the costs of raw materials and direct labor are used in the prime cost formula.

The raw materials include the oak wood and hardware used for chair manufacturing:

The Total Cost of Raw Materials = $5000 + $1500 = $6500

The Total Cost of Labor (for Carpenter) = $15 × 50 Hours = $750

The Prime Cost of manufacturing 10 Chairs = $6500 + $750 = $7250

The Prime Cost of manufacturing 1 Chair = ($6500 + $750) / 10 = $7250/10 = $725