Direct Labor Costs

Direct labor costs refer to the total cost incurred by the company for paying the wages and other benefits to the company's employees against the work performed by them, which are related directly to the manufacturing of the product of the company or for the provision of the services.

It is one of the significant components of the product cost of the company where the other components of the product cost include direct material cost and manufacturing overhead costs.

Direct labor cost is one of the significant components of the company's product cost. It includes the total paid as wages or other benefits to the company's employees. They are related directly to the manufacturing of the company's product or the provision of services.

The cost of the direct labor incurred by the company during the period is required to calculate the company's product cost, where the amount paid to workers who are working in the company but are not involved directly with the product of the company is not to be considered.

The company can include the amount paid to the full-time employees of the company, part-time employees of the company, the company's temporary employees, and the workers appointed on a contractual basis, where they are involved directly in the manufacturing or the handling of the goods.

The total value of the direct labor expense does not only include the wages paid to the employees. It also includes the other paid directly related to the products, such as payroll taxes associated with employee wages, workers' compensation insurance, life insurance, medical insurance, and other company benefits.

The following components are included:

• Wages - The wages are included in the direct labor cost. These are paid to the employees generally on an hourly basis for the goods production or provision of services.
• Payroll Taxes - These include Payroll taxes of employees engaged in the manufacturing of the products or provision of the services count.
• Worker's Compensation - This includes worker's compensation paid to employees engaged in the manufacturing of the products or provision of the services.
• Health Insurance - It includes health insurance premiums paid on behalf of those employees who are engaged in the manufacturing of the products or provision of the services.
• Life Insurance - This includes life insurance premiums paid on behalf of employees engaged in manufacturing the products or provision of the services count. Other benefits paid to or on behalf of employees involved in the manufacturing of the products or provision of the services are also included.

As stated above, these costs are sum total of the payments to be made to employees in the form of salaries, wages, and other benefits in exchange for the work they do. Hence, there is no specific direct labor costs formula to consider, but in case the number of hours or period is the basis for payment, companies can determine these costs using the following equation:

Direct Labor Cost = Pay Rate*Time taken to accomplish a task or project

From the following information, let us understand how to calculate the direct labor cost of the company for the month ending on September 30, 2019.

• Wages paid to the employees for the work related directly to the manufacturing of the product: $ 150,000
• Raw material purchased for $500,000
• Wages paid to the employees for the work that is not related directly to the manufacturing of the product: $ 110,000
• The health insurance premium paid on behalf of those employees who are engaged in the manufacturing of the product: $ 5,000

Solution:

• The total cost incurred by the company for paying the wages of the other benefits to the employees of the company against the work performed by them, which are related directly to the manufacturing of the product of the company or for the provision of the services will become part of direct labor cost.
• So, in the present case, only the Wages paid to the employees for the work-related directly to the manufacturing of the product and the Health insurance premium paid on behalf of those employees engaged in the product's manufacturing will be included in the direct labor costs.
• The raw material will be considered in the direct material cost, The wages paid to the employees for the work that is not related directly to the product's manufacturing will be part of the indirect labor cost.

This will be calculated as follows:

1. Segregating the direct labor cost from the total labor costs helps in knowing the total wages or other benefits to the company's employees against the work performed by them, which are related directly to the manufacturing of the product of the company or for the provision of the services. And the cost of labor cost left after deducting this cost from the total labor costs will be the indirect labor cost of the company.
2. It is one of the significant components of the company's product cost, i.e., the cost of the direct labor incurred by the company during the period is required to calculate the product cost of the company.

1. There are certain costs related to employees of the company where it is difficult to identify whether the cost is the direct labor cost or indirect labor cost.

This article has been a guide to what are Direct Labor Costs. We explain it with a formula, an example to show the calculation, components, advantages & disadvantages. You can learn more about it from the following accounting articles –

• Burden Rate
• Direct Materials Definition
• Income Tax Provision Definition
• Mixed Cost Calculation