Define Prime and Conversion cost

    1. Prime cost:

                                  It is the combination of direct materials cost and direct labor cost. Prime is derive from primary which means primary cost which occurs in the start of the process so its called prime cost. It is also called flat cost or basic cost.

                               Direct materials + Direct labor =Prime cost 

2. Conversion cost:

                                   It is the combination of direct labors cost and factory overheads cost. Direct labor and FOH are the two costs which convert raw materials into finished goods therefore it is called conversion cost.

                          Direct labor + FOH =Conversion cost