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What is the difference between prime costs and conversion costs?

The difference between prime costs and conversion costs involves the three cost categories associated with manufacturing a product:

Prime costs are the two direct product costs. (The indirect product cost manufacturing overhead is excluded.). Hence, the prime costs are:

  • direct materials costs
  • direct labor costs

Conversion costs are the manufacturing costs needed to convert the direct materials into products. Hence, conversion costs exclude the cost of direct materials and consist of the following:

  • direct labor costs
  • manufacturing overhead costs

As you can see, the direct labor costs are both a prime cost and a conversion cost.

AccountingCoach PRO contains a cost and managerial exam with 520 questions and answers to assist you in a better understanding of manufacturing costs.