# The Prime Cost ( Direct Costs ) Essay

Direct costs are cost objects that are directly attributable to the finished product, these can be direct materials, direct labour and direct expenses related to the production of the finished product. Prime cost is the total of all direct costs (material, labour and expenses).

Quantity x price rate = total

E.g. for machining department ‘Carom’:

450 x 12 = 5,400 1,200 x 8 = 9,600 2,230+5,400+9,600=17,230

Total prime cost for Order 2169 ‘Carom’: 17,230+8,370+9,650 = 35,250

Total prime cost for Order 2170 ‘Horal’: 12,900+14,480+11,370 = 38,750

Total prime cost for Order 2171 ‘Pecan’: 12,600+16,960+16,640 = 46,200

To max 3 marks for accurate completion of this table:

Note to workings (Full production costs / absorption costing – 6 marks):

Absorption costing refers to the techniques applied in including overhead (fixed or period – based) costs into products by establishing an overhead absorption rate:

Amount to be absorbed (£) / Basis of Absorption = Overhead Absorption Rate (OAR)

E.g. £25,000 / 2500 hours = £10.00 (OAR)

Basis hours x OAR = Overhead

Full production cost (factory) is all the prime costs plus the indirect production overheads. For full cost you include the full production cost (factory) plus indirect non-production overheads.

Note to workings (Cost of sales / closing inventory / Gross profits – absorption system)

(To max 6 marks):

Cost of sales is the cost used to create the product…