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Difficulty: HardDirect Costs and Calculation of Prime Cost

A manufacturing business reported a Prime Cost of ₦248,500\text{₦}248,500 for its operational year. The financial records contain the following summary of costs:

Cost ComponentAmount (\text{₦})
Opening inventory of raw materials28,000
Closing inventory of raw materials32,000
Direct factory wages95,000
Carriage inwards on raw materials6,500
Factory supervisor salary24,000
Production royalty14,000
Depreciation of factory plant18,000

What was the total cost of raw materials purchased during the year?

  1. \text{₦}137,000Answer
  2. B
    \text{₦}113,000
  3. C
    \text{₦}95,000
  4. D
    \text{₦}150,000

Answer

\text{₦}137,000
The value of \text{₦}137,000 is obtained by first subtracting direct labor (\text{₦}95,000) and production royalties (\text{₦}14,000) from Prime Cost (\text{₦}248,500), yielding raw materials consumed of \text{₦}139,500. Working backward through raw materials consumed (Opening Inventory + Purchases + Carriage Inwards - Closing Inventory) gives Purchases = \text{₦}139,500 - \text{₦}28,000 - \text{₦}6,500 + \text{₦}32,000 = \text{₦}137,000.

Step-by-Step Solution

1
Identify direct costs and exclude factory overheads
Direct costs comprise Direct Raw Materials Consumed, Direct Wages (\text{₦}95,000), and Production Royalty (\text{₦}14,000). Factory supervisor salary (\text{₦}24,000) and plant depreciation (\text{₦}18,000) are indirect factory overheads and must be excluded.
Prime Cost includes only direct costs directly traceable to unit production.
2
Calculate Raw Materials Consumed from Prime Cost formula
\text{Prime Cost} = \text{Raw Materials Consumed} + \text{Direct Wages} + \text{Direct Expenses}
₦248,500=Raw Materials Consumed+₦95,000+₦14,000\text{₦}248,500 = \text{Raw Materials Consumed} + \text{₦}95,000 + \text{₦}14,000
Raw Materials Consumed=₦248,500−₦109,000=₦139,500\text{Raw Materials Consumed} = \text{₦}248,500 - \text{₦}109,000 = \text{₦}139,500
Rearranging the Prime Cost equation isolates the total cost of raw materials consumed.
3
Calculate Raw Material Purchases using the inventory equation
Raw Materials Consumed=Opening Inventory+Purchases+Carriage Inwards−Closing Inventory\text{Raw Materials Consumed} = \text{Opening Inventory} + \text{Purchases} + \text{Carriage Inwards} - \text{Closing Inventory}
₦139,500=₦28,000+Purchases+₦6,500−₦32,000\text{₦}139,500 = \text{₦}28,000 + \text{Purchases} + \text{₦}6,500 - \text{₦}32,000
₦139,500=Purchases+₦2,500\text{₦}139,500 = \text{Purchases} + \text{₦}2,500
Purchases=₦139,500−₦2,500=₦137,000\text{Purchases} = \text{₦}139,500 - \text{₦}2,500 = \text{₦}137,000
Carriage inwards increases raw material acquisition cost while inventory changes adjust for stock held across periods.

Key Concept

Prime cost is the sum of direct materials consumed, direct labor, and direct expenses. Factory overheads must be omitted from Prime Cost calculations.
Estimated Time:2m 0s
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Topics

Direct Costs and Calculation of Prime Cost

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