LO 2.2Explain the difference between prime costs and conversion costs.

Prime cost = Direct material cost + Direct labor cost

Conversion cost = Direct labor cost + Manufacturing overhead cost

Explanation:

Prime cost is direct cost incurred to manufacture a product, it includes direct material and direct labor cost. Prime cost refers to directly attributable cost and is incurred along with the production e. g. if there is no production so there is no prime cost.

Conversion cost is concept that denotes the cost incurred on raw material to convert the material in to final product. The conversion process involves several costs e. g. direct material cost (daily wages, overtime etc.), manufacturing overheads (depreciation, factory rent, production supervisory, indirect material etc.). Direct labor component of conversion cost is directly attributable and is increased as the production level is increased, however manufacturing overhead remains same throughout a range of activity.