What is prime cost in accounting?

Prime cost is the total production inputs needed to create a given output. More generally, prime cost is the total amount of material and labor necessary to create a product. Businesses use prime cost to determine the price of a product and to increase profit margins.

To create a product, a business must pay for the materials to make the product and the labor to have the product made. Other costs, such as shipping and advertising, are included when prime cost is determined. When the prime cost of a product is determined, businesses are able to increase profit margins by either increasing the price of the product or decreasing the costs associated with manufacturing the product.