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Prime cost is directly related to production. So, per unit prime cost can be calculated easily. While on the other hand, overhead does not have direct relationship with production. So, to calculate per unit cost, overhead is classified according to functions.” Explain this statement and also summarize all the overheads according to their functional classification.

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Tundexi

Basically, a firm's prime cost equals the total direct costs of production which includes the cost of raw materials and labor.

  • The prime cost equation is {Cost of raw materials + Direct labor}

The overhead cost refers to those cost incurred while running a firm but can not be linked to creation of a product or service.

  • Overhead expenses is the cost remaining after deduction of direct labor, direct materials and direct expenses.

In conclusion, the prime cost and overhead cost are both significant in production of finished goods.

Read more about overhead cost

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