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Methodology

Prime Cost Planner methodology

Measure the share of sales consumed by cost of goods and direct labour, then quantify the target gap.
Duc Nguyen X.By Duc Nguyen X.· Founder, Margin101Last reviewed: View update historyMethodology

Educational only: Business decision support, not accounting, tax or legal advice.

Privacy: Calculations run locally; Margin101 does not receive your commercial inputs.

Update policy: Reviewed when formulas or official dependencies change.

Scope: Market-neutral small-business planning using your own assumptions.

1. Formulas and units

Prime Cost Ex Tax
primeCostExTax = cost of goods sold + direct labour

Where

costOfGoodsSoldExTax
Cost of goods sold (currency units, ex tax)Source: Business record
directLabourCostExTax
Direct labour cost (currency units, ex tax)Source: Business record
primeCostExTax
Prime Cost Ex Tax (currency units, ex tax)Source: Calculated output
Prime Cost Rate
primeCostRate = prime cost / sales

Where

salesExTax
Sales (currency units, ex tax)Source: Business record
primeCostExTax
Prime Cost Ex Tax (currency units, ex tax)Source: Calculated output
primeCostRate
Prime Cost Rate (decimal rate)Source: Calculated output
Operating Headroom Before Other Costs Ex Tax
operatingHeadroomBeforeOtherCostsExTax = sales − prime cost

Where

salesExTax
Sales (currency units, ex tax)Source: Business record
primeCostExTax
Prime Cost Ex Tax (currency units, ex tax)Source: Calculated output
operatingHeadroomBeforeOtherCostsExTax
Operating Headroom Before Other Costs Ex Tax (currency units, ex tax)Source: Calculated output
Target Prime Cost Ex Tax
targetPrimeCostExTax = sales × target prime-cost rate

Where

salesExTax
Sales (currency units, ex tax)Source: Business record
targetPrimeCostRate
Target prime cost rate (decimal rate)Source: Business record
primeCostExTax
Prime Cost Ex Tax (currency units, ex tax)Source: Calculated output
primeCostRate
Prime Cost Rate (decimal rate)Source: Calculated output
targetPrimeCostExTax
Target Prime Cost Ex Tax (currency units, ex tax)Source: Calculated output
Prime Cost Gap Ex Tax
primeCostGapExTax = prime cost − target prime cost

Where

primeCostExTax
Prime Cost Ex Tax (currency units, ex tax)Source: Calculated output
targetPrimeCostExTax
Target Prime Cost Ex Tax (currency units, ex tax)Source: Calculated output
primeCostGapExTax
Prime Cost Gap Ex Tax (currency units, ex tax)Source: Calculated output

Money inputs and outputs use the currency selected in the scenario without changing the canonical methodology. Rates, margins, utilisation and buffers are entered as percentages and converted to decimal values for calculation.

2. Worked example

Input assumptions

The worked rows below come directly from the exact engine and visible default fixture.

Sales
200,000 currency units/planning period, ex tax
Cost of goods sold
60,000 currency units/planning period, ex tax
Direct labour cost
50,000 currency units/planning period, ex tax
Target prime cost rate
0.55 proportion of sales allowed for cost of goods sold plus direct labour

Calculation and outputs

  1. primeCostExTax

    primeCostExTax = cost of goods sold + direct labour
    Cost of goods sold
    60,000 currency units/planning period, ex tax
    Direct labour cost
    50,000 currency units/planning period, ex tax
    Target prime cost rate
    0.55 proportion of sales allowed for cost of goods sold plus direct labour
    primeCostRate
    0.55 percent
    targetPrimeCostExTax
    110,000 money
    primeCostGapExTax
    -0 money

    Engine result: 110,000 money

  2. primeCostRate

    primeCostRate = prime cost / sales
    Sales
    200,000 currency units/planning period, ex tax
    Cost of goods sold
    60,000 currency units/planning period, ex tax
    Direct labour cost
    50,000 currency units/planning period, ex tax
    Target prime cost rate
    0.55 proportion of sales allowed for cost of goods sold plus direct labour
    primeCostExTax
    110,000 money
    targetPrimeCostExTax
    110,000 money
    primeCostGapExTax
    -0 money

    Engine result: 0.55 percent

  3. operatingHeadroomBeforeOtherCostsExTax

    operatingHeadroomBeforeOtherCostsExTax = sales − prime cost
    Sales
    200,000 currency units/planning period, ex tax
    Cost of goods sold
    60,000 currency units/planning period, ex tax
    Direct labour cost
    50,000 currency units/planning period, ex tax
    Target prime cost rate
    0.55 proportion of sales allowed for cost of goods sold plus direct labour
    primeCostExTax
    110,000 money
    primeCostRate
    0.55 percent
    targetPrimeCostExTax
    110,000 money
    primeCostGapExTax
    -0 money

    Engine result: 90,000 money

  4. targetPrimeCostExTax

    targetPrimeCostExTax = sales × target prime-cost rate
    Sales
    200,000 currency units/planning period, ex tax
    Cost of goods sold
    60,000 currency units/planning period, ex tax
    Direct labour cost
    50,000 currency units/planning period, ex tax
    Target prime cost rate
    0.55 proportion of sales allowed for cost of goods sold plus direct labour
    primeCostExTax
    110,000 money
    primeCostRate
    0.55 percent
    primeCostGapExTax
    -0 money

    Engine result: 110,000 money

  5. primeCostGapExTax

    primeCostGapExTax = prime cost − target prime cost
    Cost of goods sold
    60,000 currency units/planning period, ex tax
    Direct labour cost
    50,000 currency units/planning period, ex tax
    Target prime cost rate
    0.55 proportion of sales allowed for cost of goods sold plus direct labour
    primeCostExTax
    110,000 money
    primeCostRate
    0.55 percent
    targetPrimeCostExTax
    110,000 money

    Engine result: -0 money

Example

The worked rows below come directly from the exact engine and visible default fixture.

Prime Cost Ex Tax
110,000 currency units
Prime Cost Rate
55%
Operating Headroom Before Other Costs Ex Tax
90,000 currency units
Target Prime Cost Ex Tax
110,000 currency units
Prime Cost Gap Ex Tax
-0 currency units

The exact engine-derived outputs are shown in the labelled rows below.

Interpretation

Use the target gap to locate how much COGS or direct labour must change before other operating costs.

3. Validation and boundary checks

  • All values must be finite and inside the visible validation boundaries.
  • Rates are entered as percentages and calculations retain decimal precision.
  • Money and operational records use one consistent period and basis.
Sales minimum
salesExTax ≥ 0 currency units/planning period, ex tax — A lower value is rejected before calculation.
Sales maximum
salesExTax ≤ 10,000,000 currency units/planning period, ex tax — A higher value is rejected before calculation.
Cost of goods sold minimum
costOfGoodsSoldExTax ≥ 0 currency units/planning period, ex tax — A lower value is rejected before calculation.
Cost of goods sold maximum
costOfGoodsSoldExTax ≤ 10,000,000 currency units/planning period, ex tax — A higher value is rejected before calculation.
Direct labour cost minimum
directLabourCostExTax ≥ 0 currency units/planning period, ex tax — A lower value is rejected before calculation.
Direct labour cost maximum
directLabourCostExTax ≤ 10,000,000 currency units/planning period, ex tax — A higher value is rejected before calculation.
Target prime cost rate minimum
targetPrimeCostRate ≥ 0 proportion of sales allowed for cost of goods sold plus direct labour — A lower value is rejected before calculation.
Target prime cost rate maximum
targetPrimeCostRate ≤ 1 proportion of sales allowed for cost of goods sold plus direct labour — A higher value is rejected before calculation.

4. Assumptions and source classification

  • Demand, lead times, costs, tax and targets are supplied by the user.
  • No jurisdiction, supplier service level, industry benchmark or forecast is embedded.
  • The engine retains full precision and display formatting never feeds back into calculation.

This planner has no current policy-data dependency. Its commercial assumptions are user supplied. Registered family-level regression suites exercise the shared business-logic engine and worked-result reconciliation.

5. Limitations

  • Results depend on the quality and timing alignment of entered records.
  • The model does not replace inventory, accounting, tax, legal or financial advice.

This is educational decision support, not tax, accounting, legal or financial advice. Check the treatment of your actual transactions under the rules that apply to your business and seek qualified advice where appropriate.

6. Update and evidence policy

Registered family-level suites test formula invariants and example reconciliation; the release ledger records that coverage without claiming a separate oracle for every line of public copy. There is no official threshold or benchmark to refresh for this planner. Commercial inputs remain user-supplied because they vary by business and contract.

Change history

  1. : Initial public release of the Prime Cost planner and methodology.

Related reading

Guides to interpret the decision and its assumptions.

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