How do you cost the three elements - materials, labour and overheads - and build them into a total cost statement for a job or product?
Costing the three cost elements - materials, labour and overheads - including valuing materials issued, calculating labour cost from rates and hours, sharing overheads, and preparing a cost statement showing prime cost and total cost.
A focused answer to the SQA National 5 Accounting content on costing the three elements, covering valuing materials issued to production, calculating direct labour cost from hours and rates including overtime, sharing overheads across output, and building a cost statement that shows prime cost and total cost.
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What this dot point is asking
The SQA wants you to cost the three elements - materials, labour and overheads - and combine them into a cost statement: value the materials used, calculate labour cost from hours and rates (including overtime), add a share of overheads, and show the prime cost and total cost.
Costing materials
The materials element is the cost of the raw materials issued to production. A business records receipts and issues of materials, and values the materials used so it can be charged to the job. At National 5 the value of materials used in a job is normally given or calculated as quantity times price.
Costing labour
The labour element is the cost of the people who make the product. Direct labour is calculated from the hours worked and the rate per hour. Many questions involve overtime, paid at a premium rate such as time-and-a-half (1.5 times) or double time (2 times) for hours beyond the basic week.
Costing overheads
Overheads are the indirect costs that cannot be traced to one product - factory rent, supervision, power, depreciation of machinery. They must be shared (absorbed) across output. At National 5 a single, simple basis is used, such as a percentage of direct labour cost or a rate per direct labour hour.
Building the cost statement
The cost statement lays out the three elements in order to reach prime cost and then total cost.
Examples in context
A print shop quoting for a job adds the paper and ink (direct materials), the press operator's wages including any overtime (direct labour) to get the prime cost, then absorbs a share of rent, electricity and machine depreciation as overhead to reach the total cost. Dividing by the number of items gives the cost per item, the basis for setting a price. Building this cost statement accurately is the skill this dot point tests.
Try this
Q1. A worker does 5 overtime hours at a basic rate of and time-and-a-half. Find the overtime pay. [2 marks]
- Cue. Overtime rate ; pay .
Q2. Direct materials , direct labour . Find the prime cost. [1 mark]
- Cue. .
Q3. Overheads are of direct labour cost of . Find the overheads. [2 marks]
- Cue. .
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA N5 style4 marksA worker is paid 12 pounds per hour for a basic 35-hour week, and overtime at time-and-a-half for hours beyond 35. In one week they work 40 hours. Calculate the gross wage for the week.Show worked answer →
Basic pay (1 mark). Overtime hours , paid at time-and-a-half per hour (1 mark). Overtime pay (1 mark). Gross wage (1 mark). Markers reward separating basic and overtime hours, applying the time-and-a-half rate only to the overtime hours, and the correct gross wage.
SQA N5 style5 marksA job uses direct materials of 1200 pounds and direct labour of 800 pounds. Overheads are absorbed at 50 percent of direct labour cost. Calculate the prime cost and the total cost of the job.Show worked answer →
Prime cost direct materials direct labour (1 mark for adding the two direct costs, 1 mark for the prime cost). Overheads (1 mark). Total cost prime cost overheads (1 mark for method, 1 mark for the answer). Markers reward the prime cost, applying the overhead rate to direct labour, and adding overheads to prime cost for the total.
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