What is the difference between prime costs and conversion costs?

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.