Which cost is included in absorption costing but not in prime cost?

Which cost is included in absorption costing but not in prime cost?

• A. Fixed production overheads
• B. Direct materials
• C. Direct labour
• D. Variable overhead

Answer: (A)

The key idea is the difference between absorption costing and prime cost. Absorption costing assigns all manufacturing costs to the product, so direct materials, direct labour, and all overheads (both fixed and variable) are included in the product cost. Prime cost, however, includes only the direct inputs—direct materials and direct labour—and excludes overheads entirely. Fixed production overheads are therefore included in absorption costing but not in prime cost. Direct materials and direct labour are prime costs and would appear in both methods, and while overheads like variable overhead are also absorbed, the example that clearly shows the distinction is fixed production overheads.

The key idea is the difference between absorption costing and prime cost. Absorption costing assigns all manufacturing costs to the product, so direct materials, direct labour, and all overheads (both fixed and variable) are included in the product cost. Prime cost, however, includes only the direct inputs—direct materials and direct labour—and excludes overheads entirely.

Fixed production overheads are therefore included in absorption costing but not in prime cost. Direct materials and direct labour are prime costs and would appear in both methods, and while overheads like variable overhead are also absorbed, the example that clearly shows the distinction is fixed production overheads.