CMA Intermediate · Cost Accounting

Direct Expenses: formula sheet

Full chapter guide

Key formulas

Prime cost: Prime cost = Direct material + Direct labour + Direct expenses; Direct expenses form the third part of prime cost.
Test for a direct expense: Direct expense = Expense other than material and labour + specific to a cost unit + economically traceable; If any one condition fails, treat the item as an indirect expense (overhead).
Royalty on output: Royalty = Royalty rate per unit × Units produced; Royalty linked to production is a direct expense. Royalty linked to sales is usually an administration or selling overhead.
Hire charge for a job: Direct hire charge = Hire rate × Period the equipment is used exclusively for the job; Hire is direct only for the period the equipment is used exclusively for the job. The rest of the hire, such as idle time, goes to overheads unless the question states otherwise.
Prime cost: Prime cost = Direct material + Direct labour + Direct expenses; Direct expenses are added in the prime cost block of the cost sheet.
Royalty on production: Royalty = Royalty rate per unit × Units produced; If the rate is on output, use units produced. If it is on sales, it is a selling overhead and excluded.
Royalty as percentage: Royalty = Rate % × Value of the base given (as per agreement); Use the base stated in the question. A royalty on sales value goes to selling overheads.
Test for direct expense: Direct if it is not material or labour AND is traceable to a specific cost unit; If it cannot be traced or serves many units, treat it as overhead.
Prime cost: Prime cost = Direct material + Direct labour + Direct expenses; Direct expenses are always included in prime cost. Do not push them to overheads.
Direct expense for the period: Expense charged = Amount paid + Outstanding at end − Outstanding at start − Prepaid at end + Prepaid at start; Gives the accrual-based cost of the period. Use only the adjustments given in the question.
Per-unit direct expense: Direct expense per unit = Total direct expense ÷ Units produced; Use when the expense is incurred for a batch and you need cost per unit. Divide by units produced, not units sold, unless told otherwise.
Royalty on output: Royalty = Units produced × Rate per unit; Royalty on production is direct. Royalty on sales is an selling expense and goes to selling overheads.

Quick revision

Direct expenses are costs other than material and labour that are traceable to a cost unit economically.
Prime cost = direct material + direct labour + direct expenses.
The test is traceability, not the nature of the item.
Royalty linked to units produced is a direct expense.
Royalty linked to sales is a selling and distribution overhead, not a direct expense.
Hire of special equipment for one job is a direct expense.
Carriage inwards on materials is usually added to material cost.
Direct expenses are also called chargeable expenses.
Direct expenses need no apportionment to reach the cost unit.
Adjust for outstanding and prepaid amounts so only the current period's expense is costed.
In the cost sheet, direct expenses are shown with direct material and direct labour, and the three are totalled as prime cost. Factory overheads are added after prime cost.

Common mistakes

Treating all direct expenses as the same as direct material or labour. Fix: Keep three separate lines in the cost sheet: direct material, direct labour and direct expenses.
Classifying factory rent or power as a direct expense. Fix: If the cost serves many units and needs apportionment, it is an overhead.
Treating royalty on sales as a direct expense. Fix: Check the base. Only royalty on units produced is direct. Royalty on sales goes to selling and distribution overheads.
Treating hire of equipment used across many jobs as direct. Fix: Treat it as direct only if hired for one specific job. Otherwise it is a production overhead.
Using the amount paid as the expense without adjusting for outstanding or prepaid items. Fix: Before using any expense, scan for adjustment notes. Apply: paid + opening prepaid + closing outstanding − closing prepaid − opening outstanding.
Adding prepaid to the expense instead of deducting it. Fix: Prepaid at the end belongs to the next period, so deduct it. Outstanding at the end belongs to this period, so add it.

Exam tips

In MCQs, look for the words specific job, order or contract. They usually signal a direct expense.
Watch the base for royalty. Production-based royalty is direct, while sales-based royalty is usually an overhead.
In cost sheets, show direct expenses on a separate line before prime cost, so you earn presentation marks.
When a question gives hire for a period, check how many days the job used the item and charge only that portion.
Write one line of reason for each classification in descriptive answers.
In MCQs, read the base of a royalty carefully. Production means direct, sales means overhead.
In classification questions, give a one-line reason for each item. This earns the step marks.
In a cost sheet, show direct expenses as a separate line before prime cost, with its items listed.