differentiate between prime cost and factory cost
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difference is given below
Prime cost
Prime cost basically consists of direct cost of product i.e. direct material, direct labor and direct expenses. Prime cost directly varies with the level of activity and it is very important in decision making process.
As prime cost directly traceable to product it is therefore allocated to the product instead of apportionment.
Factory cost
Factory cost is calculated by adding the factory overhead to the prime cost. Factory cost is important for the purposes of stock valuation and setting price. Factory cost takes into account all cost related to production.
Prime cost
Prime cost basically consists of direct cost of product i.e. direct material, direct labor and direct expenses. Prime cost directly varies with the level of activity and it is very important in decision making process.
As prime cost directly traceable to product it is therefore allocated to the product instead of apportionment.
Factory cost
Factory cost is calculated by adding the factory overhead to the prime cost. Factory cost is important for the purposes of stock valuation and setting price. Factory cost takes into account all cost related to production.
abdulrahman2856:
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Factory cost refers to the total cost required to manufacture goods. This concept is the basis for several cost accounting analyses. Factory costs have traditionally been broken down into the following three categories of cost:
Direct materials. This is the cost of those materials directly associated with the construction of goods. It can also include the cost of materials destroyed during the setup and testing of production equipment, as well as a normal amount of scrap.
Direct labor. This is the cost of labor directly associated with the production of goods. This category of cost has been called into question, since most production labor is actually needed to provide a minimal level of staffing to the production area, and so should really be considered an overhead cost. Only in cases where labor costs can be specifically associated with a particular unit of production should costs be considered direct labor. For example, if a production worker is paid a piece-rate wage for each unit manufactured, this can be considered a direct labor cost.
Manufacturing overhead. This category is comprised of all the costs incurred that are needed to run a factory, but which are not associated with a specific unit of inventory. Manufacturing overhead can include, but is not limited to, the following costs:
Equipment depreciation
Equipment maintenance
Factory rent
Factory utilities
Materials handling staff wages
Production supplies
Quality assurance staff wages
Supervisor salaries
Manufacturing overhead is typically assigned to individual units of production, based on a rational and consistently-applied allocation methodology. Direct materials and direct labor costs are also assigned to individual units. Thus, all factory costs are assigned to units of production. As such, these costs are recorded as part of the inventory asset. Once the units are sold, the associated factory cost is charged to expense through the cost of goods sold account.
The "factory cost" term is sometimes applied only to manufacturing overhead costs, without consideration to the costs of direct materials or direct labor. If so, the "factory cost" term is essentially the same as factory overhead......
Prime cost is the direct cost incurred in the process of manufacturing a product and typically includes the direct production cost of goods including the raw material and direct labor costs. It is an essential part of total manufacturing expenses as costing and effective pricing of the goods are primarily determined on its basis. It becomes a base for determining price including a margin for the product that is to be sold in the market.
It is a factor of direct cost which means the summation of all the expenses like direct cost, conversion cost and manufacturing cost those are directly incurred in the actual production of goods.
Any commission paid to a salesperson associated with particular sales is added in Prime Cost.
The raw material is an industry-specific component and it may vary according to the type of goods produced, like a car manufacturer company of an automobile industry require Tyre, glass, fiber, rubber, metal, nuts and bolts and many other small tools as raw material for manufacturing a car.
While direct labor is the same in all the industries and the wages paid to the workers who worked for manufacturing a car are also accumulated with the raw material cost to calculate Prime Cost of a car.
Any indirect cost like selling, administration, advertisements overhead is not a part of Prime Cost.
Prime Cost formula = Raw Material + Direct Labour
Direct materials. This is the cost of those materials directly associated with the construction of goods. It can also include the cost of materials destroyed during the setup and testing of production equipment, as well as a normal amount of scrap.
Direct labor. This is the cost of labor directly associated with the production of goods. This category of cost has been called into question, since most production labor is actually needed to provide a minimal level of staffing to the production area, and so should really be considered an overhead cost. Only in cases where labor costs can be specifically associated with a particular unit of production should costs be considered direct labor. For example, if a production worker is paid a piece-rate wage for each unit manufactured, this can be considered a direct labor cost.
Manufacturing overhead. This category is comprised of all the costs incurred that are needed to run a factory, but which are not associated with a specific unit of inventory. Manufacturing overhead can include, but is not limited to, the following costs:
Equipment depreciation
Equipment maintenance
Factory rent
Factory utilities
Materials handling staff wages
Production supplies
Quality assurance staff wages
Supervisor salaries
Manufacturing overhead is typically assigned to individual units of production, based on a rational and consistently-applied allocation methodology. Direct materials and direct labor costs are also assigned to individual units. Thus, all factory costs are assigned to units of production. As such, these costs are recorded as part of the inventory asset. Once the units are sold, the associated factory cost is charged to expense through the cost of goods sold account.
The "factory cost" term is sometimes applied only to manufacturing overhead costs, without consideration to the costs of direct materials or direct labor. If so, the "factory cost" term is essentially the same as factory overhead......
Prime cost is the direct cost incurred in the process of manufacturing a product and typically includes the direct production cost of goods including the raw material and direct labor costs. It is an essential part of total manufacturing expenses as costing and effective pricing of the goods are primarily determined on its basis. It becomes a base for determining price including a margin for the product that is to be sold in the market.
It is a factor of direct cost which means the summation of all the expenses like direct cost, conversion cost and manufacturing cost those are directly incurred in the actual production of goods.
Any commission paid to a salesperson associated with particular sales is added in Prime Cost.
The raw material is an industry-specific component and it may vary according to the type of goods produced, like a car manufacturer company of an automobile industry require Tyre, glass, fiber, rubber, metal, nuts and bolts and many other small tools as raw material for manufacturing a car.
While direct labor is the same in all the industries and the wages paid to the workers who worked for manufacturing a car are also accumulated with the raw material cost to calculate Prime Cost of a car.
Any indirect cost like selling, administration, advertisements overhead is not a part of Prime Cost.
Prime Cost formula = Raw Material + Direct Labour
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