Q.Distinguish between Prime Cost and Factory Cost (Works Cost), stating clearly how one is derived from the other.
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Start your 14-day free trial to unlock the full solution →Prime Cost is the sum of all the DIRECT costs of production: Direct Material Consumed + Direct Wages + Direct Expenses. It represents only those costs that can be conveniently and specifically traced to a particular unit, job, or product — no indirect/overhead cost of any kind is included.
Factory Cost (Works Cost) is derived FROM Prime Cost by adding Factory (Works) Overhead — the indirect costs of running the production department as a whole (factory rent, machine depreciation, indirect material, indirect labour, factory supervision) — and adjusting for any Opening/Closing Work-in-Progress (Opening WIP added, Closing WIP subtracted). Formally: Factory Cost = Prime Cost + Factory Overhead + Opening WIP − Closing WIP.
| Basis | Prime Cost | Factory Cost (Works Cost) |
|---|---|---|
| What it includes | Only DIRECT costs (material, labour, expenses) | Prime Cost PLUS Factory Overhead (indirect production costs), adjusted for WIP |
| Position in the Cost Sheet | First cost total | Second cost total, derived from Prime Cost |
| Relationship | The starting figure | Always Prime Cost + something more (never less, since overhead only adds) |
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