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 indirect costs associated with the production process that cannot be directly traced to specific units of 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 (which includes costs related to administrative functions, such as salaries of office staff, office supplies, etc.) is not part of the factory cost. Office overhead is considered a period cost and is not included in the calculation of manufacturing costs.
• Option C: Raw materials consumed and fixed cost
• Incorrect: This option incorrectly combines raw materials consumed (which is part of prime cost) with fixed cost. Fixed costs can be part of factory overhead, but they are not a standalone category. Additionally, "fixed cost" is a broader term that can apply to both manufacturing and non-manufacturing contexts, making this option vague and misleading.
• 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 pertains to costs associated with the general management of the company and does not contribute to the production of goods.

Summary of Key Concepts

1. Factory Cost Components: The total factory cost consists of prime cost (direct materials and direct labor) and factory overhead (indirect costs).
2. Prime Cost: Directly attributable to the production of goods, including raw materials and labor.
3. Factory Overhead: Indirect costs that support production but cannot be directly traced to specific products.
4. Exclusion of Non-Manufacturing Costs: Costs such as office overhead and administrative expenses are not included in the factory cost.

Revision Summary

• The factory cost of producing goods includes both prime cost and factory overhead.
• Prime cost consists of direct materials and direct labor.
• Factory overhead includes indirect materials, indirect labor, and other indirect costs.
• Non-manufacturing costs, such as administrative overhead, are not included in factory costs.