Question

Explain the following in brief:
(a) Prime cost
(b) Fixed cost

Hint:

Remember this key relationship for exam questions: $$\text{Volume } \uparrow \quad \implies \text{ Total Fixed Cost (Constant)} \quad \implies \text{ Fixed Cost per Unit } \downarrow$$ $$\text{Volume } \uparrow \quad \implies \text{ Total Variable Cost } \uparrow \quad \implies \text{ Variable Cost per Unit (Constant)}$$

Answer 1

Step 1: Deep Analysis of (a) Prime Cost:
Prime Cost (also known as direct cost or flat cost) is the cumulative total of all direct resources physically consumed to manufacture a product. Direct costs can be easily, economically, and specifically traced back to a single unit of output. Prime Cost = Direct Materials + Direct Labor + Direct Expenses
• Direct Materials: Raw ingredients and parts that physically make up the final product (e.g., steel in a car, wood in furniture).
• Direct Labor: Wages paid to technicians, machinists, and assembly workers who directly handle and transform the raw material.
• Direct Expenses: Traceable non-material, non-labor costs directly incurred for a specific project (e.g., licensing fees for a patented design or hiring special molds for a casting run). Prime Cost serves as the foundational base of any manufacturing Cost Sheet.

Step 2: Deep Analysis of (b) Fixed Cost:
A Fixed Cost is an expense that remains constant in total amount over a specified period, regardless of fluctuations in production volume or sales activity within a defined operating range.
• Behavior in Total: Total fixed costs are constant and unchanged (e.g., factory rent of Rs. 50,000 per month must be paid whether the plant produces 1 unit or 10,000 units).
• Behavior Per Unit: On a per-unit basis, the fixed cost is inversely proportional to production volume. As production volume increases ($\uparrow$), the fixed cost per unit decreases ($\downarrow$) because the same total cost is distributed across a larger number of units. Common examples include factory rent, salaries of plant managers, building insurance, and straight-line depreciation of machinery.