What is the Difference Between Prime Cost and Conversion Cost?
🆚 Go to Comparative Table 🆚The difference between prime cost and conversion cost lies in the aspects of production they cover. Here is a comparison of the two:
Prime Cost:
- Prime costs are expenditures directly related to creating finished products.
- They include direct material and direct labor costs.
- Prime costs are useful for determining the contribution margin of a product or service and for calculating the absolute minimum price at which a product should be sold.
- In a labor-intensive process, prime costs will be large.
Conversion Cost:
- Conversion costs are expenses incurred when turning raw materials into a product.
- They include direct labor and overhead expenses.
- Conversion costs are those production costs required to convert raw materials into completed products.
- In an automated process, conversion costs will be large.
In summary, prime costs focus on the direct costs of creating a product, while conversion costs emphasize the expenses incurred during the transformation of raw materials into finished products. Both prime and conversion costs are essential for evaluating production efficiency and making informed decisions about pricing and production processes.
Comparative Table: Prime Cost vs Conversion Cost
The main difference between prime costs and conversion costs lies in the components they include. Here is a table summarizing the differences:
| Aspect | Prime Costs | Conversion Costs |
|---|---|---|
| Definition | Prime costs are the direct costs of producing goods, including direct materials and direct labor. | Conversion costs are the expenses incurred when turning raw materials into a product, including direct labor and manufacturing overhead. |
| Components | - Direct materials: The raw materials that go directly into the production of a product. - Direct labor: The wages paid to the workers to make each product. |
- Direct labor: The wages paid to the workers to make each product. - Manufacturing overhead: Costs like electricity, depreciation on the machinery used, and the salary of the factory supervisor. |
| Inclusion | Prime costs include direct materials and direct labor. | Conversion costs include direct labor and manufacturing overhead. |
| Traceability | Prime costs are directly traceable to the product, as both direct materials and direct labor are immediate and discernible. | Conversion costs are not directly traceable to the product, as manufacturing overhead costs are not immediate and discernible. |
| Usage | Prime costs are used to determine the contribution margin of a product or service and the absolute minimum price at which a product should be sold. | Conversion costs are used to layer on top of prime costs to convert raw materials into finished goods. |
For example, in the case of a furniture maker, the prime cost to produce a table might be $350, which includes $200 for raw materials and $150 for labor. The conversion cost, on the other hand, would be calculated based on the direct labor hours and manufacturing overhead costs.
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