What is Prime Cost?
Prime cost is the total of all direct costs that go into producing a finished product, specifically direct materials and direct labour. It excludes manufacturing overheads and is a key building block for product costing, pricing decisions, and gross margin analysis.
How It Works
- Identify direct materials consumed in production from the bill of materials.
- Add direct labour cost: wages of workers who physically convert materials into finished goods.
- Sum both to get the prime cost per unit or per production batch.
- Compare prime cost against selling price to understand the gross spread before overheads.
Saudi Context
Saudi manufacturers in Riyadh, Jeddah, and Dammam use prime cost as a quick pricing benchmark, especially in industries with thin margins such as food processing and metal fabrication. It is also used in ZATCA’s transfer pricing documentation when justifying cost-plus pricing between related parties.
Example
A factory making office chairs uses SAR 120 in materials and SAR 30 in direct labour per chair. The prime cost is SAR 150 per unit. Selling at SAR 250 gives a gross contribution of SAR 100 before allocating overheads.