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Difficulty: HardDirect Costs and Calculation of Prime Cost

The following transactions and balance details were extracted from the books of Zenith Manufacturing Company for the year ended 31 December 2025:

Financial ItemAmount (₦)
Opening stock of raw materials45,000
Purchases of raw materials185,000
Carriage inwards on raw materials12,500
Returns outwards of raw materials8,000
Closing stock of raw materials35,000
Direct manufacturing wages paid95,000
Accrued direct manufacturing wages15,000
Royalties paid on production22,500
Factory rent and rates40,000
Depreciation of factory machinery18,000
Factory supervisor's salary30,000

What is the total prime cost of the manufacturing entity for the year in Naira?

Answer: 332000 ₦

Answer

The total prime cost of the manufacturing entity for the year is ₦332,000.
Prime cost is calculated by summing direct materials consumed (₦199,500), direct labour adjusted for accruals (₦110,000), and direct expenses such as production royalties (₦22,500). Indirect items like factory rent, machinery depreciation, and supervisor salaries are factory overheads and are excluded from prime cost, giving a final answer of ₦332,000.

Step-by-Step Solution

1
Calculate the cost of raw materials consumed during the production period
Raw Materials Consumed = ₦45,000 + ₦185,000 + ₦12,500 - ₦8,000 - ₦35,000 = ₦199,500
Carriage inwards is added to purchases to obtain the total cost of raw materials delivered, returns outwards are deducted, and closing stock is subtracted to determine materials actually used in production.
2
Adjust direct wages paid for accrued wages at the end of the financial period
Direct Labour = ₦95,000 + ₦15,000 = ₦110,000
Under the accrual concept of accounting, incurred costs belonging to the period must be added to payments made.
3
Identify direct expenses attributable directly to production
Direct Expenses = Royalties on production = ₦22,500
Royalties paid per unit produced are direct expenses because they vary directly with output.
4
Sum all direct cost components to find Prime Cost
Prime Cost = ₦199,500 + ₦110,000 + ₦22,500 = ₦332,000
Prime cost is the aggregate of direct materials consumed, direct labour, and direct expenses. Indirect factory costs such as factory rent (₦40,000), plant depreciation (₦18,000), and supervisor salary (₦30,000) are factory overheads and must be excluded.

Key Concept

Prime Cost Calculation in Manufacturing Accounts
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Topics

Direct Costs and Calculation of Prime Cost

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