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      Question

      A company’s cost sheet shows the following elements:

      direct materials, direct labour, and variable factory overheads. The aggregate of these costs will be referred to as the ________
      A Prime Cost Correct Answer Incorrect Answer
      B Conversion Cost Correct Answer Incorrect Answer
      C Marginal Cost Correct Answer Incorrect Answer
      D Total Cost Correct Answer Incorrect Answer
      E Works Cost Correct Answer Incorrect Answer

      Solution

      Marginal Cost is the total of all variable costs, which include direct materials, direct labor, and variable overheads. It represents the cost of producing one additional unit.   Since variable overheads are included, the total becomes Marginal Cost, not Prime Cost.   Note: ·        Prime cost = direct material + direct labour + direct expenses

      • Conversion Cost = Direct Labor + Manufacturing Overheads (it excludes material)
      • Works Cost = Prime Cost + Factory Overheads (Factory/Manufacturing Overhead includes indirect labor, materials, and expenses)
      • Total Cost = Works Cost + Administrative/Selling Overheads 

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