Final answer:
The true statement regarding prime cost is that it refers to the direct costs of the product such as direct labor, materials, and other direct expenses. This includes costs directly attributed to the production of goods or services. Prime cost is calculated separately from overhead or fixed costs and is an important factor in determining overall production costs and pricing strategies. The correct answer is option: b. The prime cost refers to the direct costs of the product
Step-by-step explanation:
- Of the statements provided, the true one is: b.The prime cost refers to the direct costs of the product such as direct labour, materials, and other direct expenses. This includes only the costs that can be directly attributed to the production of goods or services.
- Prime cost is a way to measure costs directly tied to production, separate from overhead or fixed costs. It is important to note that under the absorption costing method, not just prime costs, but also a portion of fixed costs are allocated to each unit produced when calculating the ‘cost per unit’.
- Understanding how to measure costs is critical in business, as it can influence pricing, investment, and production decisions. The average cost (AC) gives an overview of the cost incurred on average for producing a given quantity and is calculated as AC = TC/Q. Marginal cost (MC), on the other hand, is the cost of producing one additional unit of output, which in our widget example would be calculated as MC = ΔTC/ΔQ.
It is clear that as production increases, input requirements and associated costs also go up. It's essential for businesses to understand not only their total costs but also how these costs behave on a per-unit basis to make informed decisions in pricing and production.