Cost Categories of a Manufactured Product
Prime costs and conversion costs pertain to the three cost categories of a manufactured product:
Definition of Prime Costs
Prime costs are the combination of the two direct product costs:
- Direct materials costs
- Direct labor costs
Definition of Conversion Costs
Conversion costs are the two categories of manufacturing costs that are needed to convert the direct materials into products:
- Direct labor costs
- Manufacturing overhead costs
As you can see, the direct labor costs are considered to be both a prime cost and a conversion cost.
