A prime cost is the total direct costs of production, including raw materials and labor.

Indirect costs, such as utilities, manager salaries, and delivery costs, are not included in prime costs.

Prime Costs

- are expenditures directly related to creating finished products.

- include direct material and direct labor costs.

23. Wheel and Tire Manufacturing currently produces 1,000 tires per month. The following per unit data apply for sales to regular customers:

Direct materials P20

Direct manufacturing labor 3

Variable manufacturing overhead 6

Fixed manufacturing overhead 10

Total manufacturing costs P39

The plant has capacity for 3,000 tires and is considering expanding production to 2,000 tires. What is the total cost of producing 2,000 tires?

a. P39,000
b. P78,000
c. P68,000
d. P62,000

*Solution:

DM (P20 x 2,000 units) + DL (P3 x 2,000 units) + VOH (P6 x 2,000 units) + FOH (P10 x 1,000 units) = P40,000 + P6,000 + P12,000 + P10,000 = P68,000

38. A hotel has recorded that the costs incurred were P570 when 340 guests stayed for one night. They know that the fixed laundry cost is P400 per night. What
is the variable laundry cost per guest-night (to the nearest cent)?

a. P 0.50
b. P 1.18
c. P 1.68
d. None of the above

*Solution:

Y = total cost a = fixed cost

b = variable cost per unit x = activity level

Formula: Y = a + bx

P570 = P400 + b(340 guests)

P570 = P400 + 340b

340b = P400 – P570

340b = -P170
340 340

b = P0.50