1.2.Cost and Prime Cost Concepts

In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

A prime cost is a business expense for the materials and labor it uses in production. Prime cost is a way of measuring the total cost of the production inputs needed to create a given output. By analyzing its prime costs, a company can determine how much it must charge for its finished product in order to make a profit. By lowering its prime costs, a company can increase its profit margin and/or undercut its competitors' prices. Examples of prime costs are:

   Direct materials. This is the raw materials used to construct a product. This may also include supplies consumed during the production of individual units, of such an association can be established.

   Piece rate pay. This is the cost of labor and related payroll taxes directly associated with the production of one additional unit. It does not include other types of labor, such as manning an assembly line, if such labor cannot be clearly associated with the production of individual units.

   Service labor. This is the cost of billed labor, such as the cost of consulting labor billed to a client.