Examkin

Question

Difficulty: MediumPurpose and Key Terminologies in Manufacturing Accounts

In a manufacturing firm producing leather footwear, various expenses are incurred during the production process. Which of the following costs is classified as a direct expense and included in the calculation of Prime Cost?

  1. Royalties paid to a designer based on the specific number of units producedAnswer
  2. B
    Salary paid to the factory quality control supervisor
  3. C
    Carriage outwards paid for delivering finished footwear to distributors
  4. D
    Cost of purchasing a new industrial leather-cutting machine

Answer

Royalties paid to a designer based on the specific number of units produced
Royalties paid per unit produced are direct expenses because they can be traced completely to individual manufactured items. Adding direct expenses to direct materials and direct labor gives Prime Cost.

Step-by-Step Solution

1
Understand the components of Prime Cost
Prime Cost consists of direct materials, direct labor, and direct expenses.
Prime Cost includes all expenditure directly traceable to the physical unit of production.
2
Identify the nature of direct expenses
Direct expenses are expenses other than direct materials and direct labor incurred specifically for a particular product or batch (e.g., royalties paid per unit produced or specialized equipment hire).
Royalties paid on a per-unit basis can be directly attributed to each item manufactured.
3
Differentiate direct expenses from indirect manufacturing overheads and non-manufacturing costs
Factory supervisor salary is indirect labor (factory overhead); carriage outwards is a selling expense; machinery purchase is capital expenditure.
Only royalties paid per unit manufactured meet the strict definition of direct expenses.

Key Concept

Direct Costs and Prime Cost Classification
Estimated Time:1m 0s
Rate this question

Topics

Purpose and Key Terminologies in Manufacturing Accounts

More questions from this topic