Prime cost is the cost of the raw materials used to make the goods plus the direct wages (and any direct expenses). It is the first subtotal in a manufacturing account, and the starting point for factory cost.
The skill follows sorting direct and indirect costs in manufacturing accounts. It borrows the layout of cost of sales, with raw materials in place of goods for resale.
How do you build prime cost?
Work in two stages.
- Raw materials used. Opening raw materials, plus purchases, plus carriage inwards, minus returns outwards, minus closing raw materials.
- Prime cost. Raw materials used, plus direct wages, plus direct expenses if given.
Opening inventory is added because it was available to use. Closing inventory is subtracted because it is still on the shelf. The same logic is in cost of sales for a shop.
Worked example
Kilang Kasut Anggun makes shoes. For the year, in RM:
| Item | RM |
|---|---|
| Raw materials, opening | 3,500 |
| Raw materials purchased | 26,000 |
| Carriage inwards | 700 |
| Returns outwards | 1,200 |
| Raw materials, closing | 4,000 |
| Direct wages | 15,500 |
| Royalty on a patented design, paid per pair made | 1,500 |
Step 1, materials available: 3,500 + 26,000 + 700 − 1,200 = RM 29,000.
Step 2, materials used: 29,000 − 4,000 = RM 25,000.
Step 3, add direct costs: 25,000 + 15,500 + 1,500 = RM 42,000.
The layout in a manufacturing account looks like this.
| RM | |
|---|---|
| Opening raw materials | 3,500 |
| Add purchases | 26,000 |
| Add carriage inwards | 700 |
| Less returns outwards | (1,200) |
| Less closing raw materials | (4,000) |
| Raw materials used | 25,000 |
| Direct wages | 15,500 |
| Direct expenses (royalty) | 1,500 |
| Prime cost | 42,000 |
The mistake to watch for
A common slip is to add closing raw materials instead of subtracting them.
Mistaken answer: 3,500 + 26,000 + 700 − 1,200 + 4,000 = 33,000 materials used, so prime cost = 33,000 + 15,500 + 1,500 = 50,000.
The student treated closing inventory as another cost.
Closing raw materials are not used yet. Adding them makes the error twice the size of the inventory, which is 8,000 here: 50,000 − 42,000.
The correction is to subtract. A quick check is that materials used should never be more than materials available.
Check yourself
Try these on paper first, then open each answer.
1. Opening raw materials are RM 2,000, purchases RM 18,000, closing raw materials RM 2,500 and direct wages RM 9,000. Find the prime cost.
Show answer
Materials used: 2,000 + 18,000 − 2,500 = 17,500. Prime cost: 17,500 + 9,000 = RM 26,500.
2. Raw materials used were RM 40,000 and prime cost was RM 61,000. There were no direct expenses. Find the direct wages.
Show answer
Direct wages = 61,000 − 40,000 = RM 21,000.
3. Purchases RM 30,000, returns outwards RM 2,000, carriage inwards RM 500, opening raw materials RM 1,500, closing raw materials RM 2,000, direct wages RM 12,000, factory rent RM 6,000. Find the prime cost.
Show answer
Materials used: 1,500 + 30,000 − 2,000 + 500 − 2,000 = 28,000. Prime cost: 28,000 + 12,000 = RM 40,000. The factory rent of RM 6,000 is an overhead and is left out.
Where this leads next
With prime cost secure, move on to adjusting for work in progress, where overheads are added. Then try the manufacturing accounts practice set. If a question gives a cost as a share of another figure, the percentage-base explorer shows which amount the percentage applies to.
Students sometimes get the layout right but cannot say why a figure is added or subtracted. That is where online one-to-one Accounting tuition helps, because a teacher can ask for the reason behind each line.