Question

It is the aggregate of indirect material costs, indirect labour costs and indirect expenses:

• A. Material cost
• B. Labour cost
• C. Overhead cost
• D. Variable cost
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Hint:

An easy formula to remember for cost classification: $$\text{Total Cost} = \text{Prime Cost (Direct)} + \text{Overheads (Indirect)}$$

Answer 1

The Correct Option is C

Step 1: Cost Accounting Elements:
In cost accounting, total manufacturing cost is analyzed by dividing expenses into three primary elements: Material, Labour, and Expenses. Each element has a Direct and an Indirect component.

Step 2: Understanding Cost Groupings:
Let us look at how these elements are grouped mathematically:
• Prime Cost: The sum of all direct production elements. $$\text{Prime Cost} = \text{Direct Materials} + \text{Direct Labour} + \text{Direct Expenses}$$
• Overhead Cost: The aggregate of all indirect production/support elements. $$\text{Overhead Cost} = \text{Indirect Materials} + \text{Indirect Labour} + \text{Indirect Expenses}$$

Step 3: Analyzing the Options:

• Material Cost: Represents the cost of materials (both direct and indirect).
• Labour Cost: Represents the cost of labor (both direct and indirect).
• Overhead Cost: By definition, overheads comprise all indirect costs that cannot be traced directly to a specific unit of production.
• Variable Cost: Costs that vary directly with production volume; they can contain both direct and indirect components. Therefore, the correct term for this aggregate is Overhead cost.