Question

a) 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

Part A

Prime costs are costs that can be directly assigned to production of each unit. It includes direct materials and direct labor.

Product costs are part of cost of production and examples of product costs are direct materials, manufacturing overhead, direct labor and so on. Product costs are direct costs which are directly associated with manufacturing process.

Period costs are not the part of cost of production and examples of period costs are salary, rent, and depreciation, etc. period costs are indirect costs and are not directly related to the manufacturing process.

All prime costs, product costs and period costs are important cost elements in managerial accounting and take important business decisions.

Part B

Fixed costs are costs that do not change with activity level. Total fixed costs remain the same and examples of fixed costs are salary, depreciation, rent, etc.

Variable costs are costs that change with activity level. They vary directly with the output volume. Examples of variable costs are direct materials, direct labor, etc.

Both fixed costs and variable costs are important elements of total accounts. In managerial accounting, both of these costs are important in decision making process.