Which statement about prime cost is true?

Which statement about prime cost is true?

• A. It includes fixed overheads
• B. It excludes direct materials
• C. It is the sum of direct materials, direct labour, and direct expenses
• D. It includes the cost of marketing

Answer: (C)

Prime cost is the direct input into making a product that can be traced straight to production. It includes the costs that are directly tied to the unit of output: direct materials, direct labour, and direct expenses (costs directly attributable to production, such as specific charges for tools or royalties tied to production). It excludes overheads (like fixed overheads) and any selling or marketing costs. So the true statement is that prime cost is the sum of direct materials, direct labour, and direct expenses. The other options aren’t correct because fixed overheads are part of manufacturing overhead, not prime cost; direct materials are included in prime cost, not excluded; and marketing costs are selling expenses, not production costs.

Prime cost is the direct input into making a product that can be traced straight to production. It includes the costs that are directly tied to the unit of output: direct materials, direct labour, and direct expenses (costs directly attributable to production, such as specific charges for tools or royalties tied to production). It excludes overheads (like fixed overheads) and any selling or marketing costs.

So the true statement is that prime cost is the sum of direct materials, direct labour, and direct expenses. The other options aren’t correct because fixed overheads are part of manufacturing overhead, not prime cost; direct materials are included in prime cost, not excluded; and marketing costs are selling expenses, not production costs.