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Difficulty: HardPurpose and Key Terminologies in Manufacturing Accounts

A commercial publishing firm producing custom-designed academic textbooks incurred the following expenditures during a financial period:

I. Copyright royalties paid per copy to book authors
II. Cost of paper and printing ink used in production
III. Rental fees for specialized binding machinery hired exclusively for a specific job
IV. Salary of the factory maintenance engineer

Which combination of items strictly represents direct expenses in the calculation of Prime Cost?

  1. A
    Copyright royalties paid per copy to book authors, cost of paper and printing ink, and rental fees for specialized binding machinery
  2. B
    Rental fees for specialized binding machinery hired exclusively for a specific job and salary of the factory maintenance engineer
  3. Copyright royalties paid per copy to book authors and rental fees for specialized binding machinery hired exclusively for a specific jobAnswer
  4. D
    Cost of paper and printing ink used in production and salary of the factory maintenance engineer

Answer

Copyright royalties paid per copy to book authors and rental fees for specialized binding machinery hired exclusively for a specific job.
Direct expenses are costs specifically incurred for a particular job or product line, apart from direct materials and direct labour. Copyright royalties paid per copy to authors and rental fees for specialized machinery hired exclusively for a specific contract are directly traceable to specific production runs and are therefore classified as direct expenses.

Step-by-Step Solution

1
Define Prime Cost and its components
Prime Cost consists of Direct Materials + Direct Labour + Direct Expenses.
Understanding the components of Prime Cost is essential for proper cost classification in manufacturing accounts.
2
Identify the definition of Direct Expenses
Direct expenses are expenditures incurred directly and exclusively for a specific product, job, or batch, other than raw materials and direct labour.
This isolates direct expenses from direct materials, direct labour, and indirect factory overheads.
3
Classify each given cost item
Item I (Author Royalties) = Direct Expense; Item II (Paper and Ink) = Direct Material; Item III (Special Machinery Hire for a Specific Job) = Direct Expense; Item IV (Factory Maintenance Engineer Salary) = Factory Overhead (Indirect Labour).
Evaluating each item against cost classification definitions allows accurate categorization.
4
Select the combination consisting strictly of Direct Expenses
Items I and III constitute direct expenses.
Only author royalties and job-specific machinery rental represent direct expenses.

Key Concept

Classification of Direct Expenses within Manufacturing Accounts
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Topics

Purpose and Key Terminologies in Manufacturing Accounts

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