The difference between prime costs and conversion costs involves the three cost categories associated with manufacturing a product:
Direct materials
Direct labor
and manufacturing overhead (also known as factory overhead, production overhead, burden, indirect product costs, etc.)
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
