Why prime cost matters to a first-time founder
Prime cost shows the spending directly traceable to making a product. If you omit materials or hands-on labour, you may price below the cost of fulfilling an order. Tracking it also shows whether supplier prices, waste or production time are eroding each sale’s contribution.
Examples of prime cost
A furniture maker uses €80 of timber and pays €60 of direct labour for one desk. Its prime cost is €140. Factory rent and the production manager’s salary are overheads, so they are not included, although the selling price must still help cover them.
Common misunderstanding
Prime cost is not the full production cost. It excludes manufacturing overhead such as factory rent, utilities and indirect labour. It also differs from a service company’s general operating costs, although direct contractor time can form part of prime cost when it is traceable.
When to use it
Use it when setting prices, estimating gross margin or investigating why manufacturing jobs are becoming less profitable. Ignore the label when every cost is general overhead and cannot be traced sensibly to one unit, but still separate direct from indirect costs for planning.