Question

Compute Prime Cost:
Direct material = Rs. 24,000
Direct labour = Rs. 15,000
Direct expenses = Rs. 12,000
Other overheads = Rs. 40,000

Hint:

To avoid simple errors on your exams, remember that Prime Cost only contains direct costs. Always ignore overheads (whether they are factory, administration, or selling overheads) when calculating Prime Cost. Overheads are added after the Prime Cost stage to determine the Works Cost and Cost of Production: $$\text{Works Cost} = \text{Prime Cost} + \text{Factory Overheads}$$

Answer 1

Step 1: Defining Prime Cost and Isolating Direct Elements:
In cost accounting, Prime Cost represents the aggregate of all direct, traceable costs incurred to manufacture a product. Direct costs can be easily and economically traced back to a specific cost unit. Overheads represent indirect costs that are not directly traceable and are excluded from this baseline calculation. Prime Cost = Direct Materials + Direct Labor + Direct Expenses

Step 2: Processing the Given Financial Variables:
We extract and classify the variables provided in the prompt: Direct Materials &= Rs. 24,000 (Direct cost -- Included)
Direct Labor &= Rs. 15,000 (Direct cost -- Included)
Direct Expenses &= Rs. 12,000 (Direct cost -- Included)
Other Overheads &= Rs. 40,000 (Indirect cost -- Excluded from Prime Cost)

Step 3: Calculating the Total:
Substitute the direct cost values into the Prime Cost formula: Prime Cost &= Rs. 24,000 + Rs. 15,000 + Rs. 12,000
Prime Cost &= Rs. 39,000 + Rs. 12,000
Prime Cost &= Rs. 51,000