Prime Cost Formula in Manufacturing

Steps:

• Recall that prime cost includes only costs directly traceable to production.
• Identify direct materials as raw inputs used in goods.
• Add direct labor as wages for workers producing goods.
• Include direct expenses as other traceable costs like royalties, excluding indirect overheads.

Why the correct option is correct:

• Prime cost is defined as direct material + direct labour + direct expenses, per standard cost accounting formulas, focusing solely on direct production costs.

Why the others are wrong:

• B and D: Factory overheads are indirect costs, not part of prime cost; they form factory cost when added to prime cost.
• C: Includes factory overheads, which inflate prime cost into total factory cost.

Final answer: A