Accounting – 5.5 Manufacturing accounts | e-Consult

Direct Materials: These are the costs of the raw materials that can be directly traced to a specific product. In the case of ABC Manufacturing, the wood, screws, and glue used to make the table are direct materials. They are a fundamental part of the finished product.

Direct Labour: This refers to the wages paid to workers who are directly involved in the manufacturing process. The wages of the person assembling the table are direct labour costs.

Prime Cost: This is the sum of direct materials and direct labour. It represents the direct costs incurred in producing a product before any factory overheads are added.

Factory Overheads: These are indirect costs incurred in the factory, such as rent, utilities, depreciation of machinery, and supervisor salaries. They cannot be directly traced to a specific product but are necessary for the overall operation of the factory.

Calculation of Prime Cost:

Prime Cost = Direct Materials + Direct Labour

Prime Cost = £20 + £15 = £35

Therefore, the prime cost of one table is £35.