Correct Option: A. Prime cost and factory overhead Explanation of the Correct Answer The factory cost of producing goods, often referred to as the total manufacturing cost, includes all costs incurred in the production process. This encompasses two main components:

1. Prime Cost: This is the direct cost of manufacturing a product, which includes:
2. Direct Materials: The raw materials that are directly used in the production of goods. For example, if you are manufacturing furniture, the wood used would be a direct material.
3. Direct Labor: The wages paid to workers who are directly involved in the production process. For instance, the salary of the workers assembling the furniture.
4. Factory Overhead: Also known as manufacturing overhead, this includes all the indirect costs associated with the production process that cannot be directly traced to a specific product. This can include:
5. Indirect materials (e.g., glue, nails)
6. Indirect labor (e.g., salaries of maintenance staff)
7. Utilities, rent, and depreciation of the factory building and equipment.

When you sum up the prime cost and factory overhead, you arrive at the total factory cost of producing goods. Why the Other Options Are Incorrect

• Option B: Prime cost and office overhead
• Incorrect: While prime cost is a valid component of manufacturing costs, office overhead refers to costs associated with administrative functions, such as salaries of office staff, office supplies, and utilities for office space. These costs are not part of the manufacturing process and therefore do not contribute to the factory cost of producing goods.
• Option C: Raw materials consumed and fixed cost
• Incorrect: This option mentions raw materials consumed, which is part of prime cost, but "fixed cost" is too broad and does not specifically relate to the manufacturing process. Fixed costs can include costs that are not directly tied to production, such as rent for a factory space that remains constant regardless of production levels. Therefore, this option does not accurately represent the components of factory cost.
• Option D: Raw materials and administrative overhead
• Incorrect: Similar to option B, this option includes administrative overhead, which is not part of the factory cost. Administrative overhead costs are related to the general management of the company and do not contribute to the production of goods. Raw materials are indeed part of the prime cost, but without the inclusion of factory overhead, this option is incomplete.

Summary of Key Points

• The factory cost of producing goods consists of prime cost (direct materials and direct labor) and factory overhead (indirect costs related to production).
• Prime cost is essential for calculating the direct costs of manufacturing, while factory overhead accounts for indirect costs that support production.
• Options that include administrative or office overhead are incorrect as they do not pertain to the manufacturing process.
• Understanding the distinction between direct and indirect costs is crucial for accurate cost accounting in manufacturing.

This comprehensive understanding of factory costs will aid in better financial decision-making and cost management in a manufacturing context.