Question

What are the similarities and differences between prime cost, product cost and period cost. b) What are the similarities and differences between fixed costs, variable costs.

Answer 1

a.

Prime cost includes direct material (consumed) cost, direct labor cost, and direct expenses; these are all included with product cost of making product. There is another item included in product cost, allocated factory overhead, which is not in the prime cost.

Period cost appears as the time goes on; these costs are Office expenses, general administrative expenses, selling expenses, and distribution expenses. These are neither prime costs nor product but to be treated separately in the income statement.

b.

Both fixed and variable costs are important in the subject of costing.

The cost that doesn’t vary with production units is fixed cost; examples are salary of office staff, rent of building, etc. Variable does vary with production units; examples are direct material cost, direct labor cost, etc.

Per-unit of fixed cost is variable as the unit changes. Per-unit of variable cost is fixed irrespective of the change in production units.