 In this presentation, we will take a look at prime costs and conversion costs. When considering prime costs and conversion costs, we are looking at the cost of production. We're looking at production costs as opposed to period costs. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. When considering production costs, we always think about direct materials, direct labor and overhead. They should always come to mind when we think about production. Anytime we think about inventory, whether we make it or whether it be made someplace else, it's costs include the direct materials, direct labor overhead. We here talking about a manufacturing company are going to apply these three items at this point in time because we are the individuals of the company that is manufacturing the product. So remember, it's not just the materials within the product. That's one component, but the other component is going to be the labor that we're going to put into it. The cost of the labor, the wages we pay are not going to be a period experience, but be part of the cost of inventory to be capitalized be put on the balance sheet until we sell the inventory put on the balance sheet as in as a piece of the inventory as an asset. And then the overhead, anything dealing with the factory, anything that deals with the factory will be part of the inventory. If we have depreciation on the factory, if we have, if we have maintenance on the factory, if we've got supervisors within the factory that are paid salary, all that stuff is going to be in the inventory in some way, they're going to be part of the product. So anytime we think of inventory, we have direct materials, direct labor and overhead. Now, when we consider these in terms of prime costs and conversion costs, there's a bit of an overlap here because the prime costs represent what is going to be directly within the product. Therefore, the prime costs include the direct materials and the direct labor. Now the direct labor we can't really see within the product, of course, like the direct materials, but it's so closely associated to the product, it's so essential to the production that we're going to call those the prime costs. Now that's going to differentiate from conversion costs, although there are some overlaps that conversion costs are the costs that we're going to have that will be used to convert the raw material to the finished goods. The cost that means that we're doing something, we're doing something to the raw material. So in the example of a guitar, the direct material would be something like the wood, the conversion would be anything we do to that in order to make it into a guitar. So conversion costs are then going to include as well, direct labor and the overhead because the direct labor is going to be part of us processing it and the overhead is going to be included anything that's in the factory because of course we need that factory in order to convert. So anything like the depreciation on the factory, the supervisor salary on the factory, the small tools that we use, the glue that we're going to use, all that stuff is part of the conversion process, part of the things that we're doing to adding on to that piece of wood in order to convert it from just a piece of wood to the end product to the guitar. Now this is going to be an added category that we can start to get confused with something like direct versus an indirect cost. It's a bit different of a concept, we need to keep these separated. So the prime costs and the conversion costs, we're often going to use more when we use a process cost system, we'll talk about a job cost versus a process cost system. But it's different than the direct costs and the indirect costs. Remember that our direct costs are going to be those that are direct materials and direct labor are both direct costs, which happens to be the two prime costs as well. But for different reasons, these two are going to be direct costs, because we can apply those activities to a particular unit. If we have a job cost system, we can apply those two activities to a particular guitar. We know which guitars were worked on and can therefore apply these these costs to that guitar. Whereas the overhead was indirect, because we didn't know which in a job cost system, we wouldn't know which guitar to apply all the stuff in overhead to. We have to find some way to do that. So if you compare the two, the prime costs are utilizing the same factors as as the direct costs. But for different reasons, the prime costs meaning that they're going to be prime, the prime factors of productions, the primary expenditures, the ones that are going to be most associated with the manufacturing of the inventory. So those two are similar. The difference, of course, is that conversion costs does not equivalent or is not at all the same as the indirect costs. The indirect costs are just going to be the overhead, because we can't apply them. If you think of a job cost system, we can't apply them to the job. That's why they're indirect. That's why they're in overhead. From a conversion standpoint, the conversion means anything that we're doing to the inventory to convert it. So that's why it's going to include the direct labor. So here's where the overlap is. This direct labor becomes a bit confusing because it's both a prime cost and a conversion cost. And when we consider that and compare and contrast it to direct versus indirect, prime costs and direct costs happen to have the same two components. But for different reasons, the conversion is not the same as the indirect costs, because the conversion represents us converting this information, which will include this direct labor, as well as the overhead.