Which of the following is a component of prime cost?

Prime cost is made up of direct materials, direct labour, and direct expenses, that is, costs that can be traced directly to specific units of output. A royalty paid to the owner of a patent, design, or process, calculated per unit produced or sold, is a direct expense, because it is incurred specifically because those units were made, and it can be traced to them.

Factory rent, depreciation, and factory electricity, by contrast, are all factory (production) overheads. They are costs of running the factory as a whole rather than costs that can be attributed to any one unit of product; a factory still incurs rent, depreciation, and electricity costs even during periods when production output changes, so they cannot be traced directly to individual units in the way a royalty can.

The test to apply is whether a cost is incurred directly because of, and in proportion to, the units actually produced. Royalty payments pass this test; rent, depreciation, and electricity do not.

When prime cost components are being tested, look for costs described as "direct" or paid per unit of output, since these signal prime cost items rather than overheads.