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Prime costs and conversion costs are relied upon heavily in the manufacturing sector as a metric to determine efficiency in the production of a specific product. Prime costs are defined as the expenditures directly related to creating finished products, while conversion costs are the expenses incurred when turning raw materials into a product. Prime costs and conversion costs include some of the same factors of production expenses, but each provides a different perspective into production efficiency.
The calculation for prime costs includes the total amount spent on direct materials in addition to direct labor. Tangible components, such as raw materials, necessary to create a finished product are included in direct materials. For instance, the engine
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