DIRECT LABOR: CHARACTERISTICS, HOW IT IS MEASURED AND EXAMPLES - DUDAS - 2025

The direct labor is the labor of production or service that is assigned to a product, a cost center, or to a specific work order. When a company manufactures products, direct labor is considered the labor of the production personnel who directly produce the goods. For example, machine operators, assembly line operators, painters, etc.

If a business provides services, direct labor is considered the labor of those people who directly serve customers. For example, consultants and lawyers.

Source: pixabay.com

In general, a person who is charging a customer for billable time is working direct business hours.

The direct labor cost is generally considered the cost of normal hours. They are also shift differentials and overtime worked by workers. Likewise, the amounts related to payroll taxes.

characteristics

Direct labor is the amount of effort exerted by employees to convert raw materials into finished products. In other words, what the manufacturer sells is the work of the employees.

This work can be traced directly to the products they help produce. For example, a welder, machinist, or painter helps produce a specific product. Direct labor is often referred to as direct cost rather than effort.

This is in contrast to indirect labor costs, which cannot be assigned to a single product. For example, workers who help machine operators clean their machines cannot be assigned their work to just one product, because they don't actually produce anything.

Direct cost

Since labor is one of the largest expenses on a manufacturer's income statement, cost accountants seek to track and control these costs. For that reason they are separated from indirect costs.

Management tracks direct labor costs and allocates them to the products they help produce.

For example, an assembly line worker at a Ford Motor plant who bends the fender parts not only helps produce the overall vehicle, he also produces the fender itself.

Therefore, direct labor cost does not involve employees who are not involved in production, such as administrative staff members. It is only composed of the personnel responsible for production.

Direct cost is related to the amount spent to manufacture the final product. This includes both direct labor and direct material costs.

How to measure direct labor cost

To accurately measure the cost of direct labor, an entity must consider all expenses and not simply wages.

Therefore, the entity will generally include the cost related to social security paid by the employer. Likewise taxes related to unemployment and health care expenses. There is also insurance related to worker's compensation and pension plan contributions under consideration.

Companies may also have to consider allocating an amount for the hiring and training of workers. This way they can arrive at the total cost of labor.

Calculation of direct labor cost

To calculate direct labor cost, entities should ensure that they include every detail. This essentially represents a cost to them in terms of hiring and keeping an employee.

The company must establish a standard rate or model in order to analyze the cost of direct labor effectively. This rate is usually an estimate of what the company expects the direct labor cost to be under typical conditions.

So there are basically two main components to this particular model. The estimated cost of an hour of direct labor, as well as the number of hours that a labor spends producing a unit of product.

For example, a company's total labor cost for one hour is $ 15 and it expects to spend 0.5 hours on each unit during production. If you make 1,000 units per week, then your standard labor cost will be $ 7,500.

Examples

An example of direct labor would be workers in a construction company that builds buildings. Workers in factories that make products and workers in retail stores that serve customers also engage in direct labor.

However, workers who support that process, such as human resources, accounting, and other clerical employees, engage in indirect work.

Most modern factories and assembly lines balance workers and robots to assemble products.

For example, the Ford Motor plant uses robots for spot welding and painting. However, it uses human labor for assembly and other more technical tasks.

Candy shop

Juan runs a candy store and has decided to add a new line of sea salt candies. Juan believes that the new type of candy will be a success, because consumers request more sea salt products.

However, as the product is new, expenses and sales must be closely watched to ensure that the sea salt candies are profitable.

One of the biggest expenses for new candy is labor. This is because the candy must be dipped in chocolate by hand. Likewise, sea salt should be added to the top of the candies individually.

Because there is direct labor, payroll costs that are specifically related to the creation of sea salt candy are included in the cost of production as direct labor.

This amount can be further broken down. In the candy store, you have many employees who work on different types of candy.

Since payroll is one of the largest expenses in a business, direct labor costs will have a substantial impact on the cost of creating the candy. For this reason, it is vital that direct costs are calculated and added to the costs of merchandise sold.

The most effective way for a small business to analyze direct labor costs is to have employees track their time and activities.

Themes of interest

Indirect manufacturing costs.

Processing industry.

References

1. Steven Bragg (2018). Direct labor. Accounting Tools. Taken from: accountingtools.com.
2. Harold Averkamp (2018). What is direct labor? Accounting Coach. Taken from: accountingcoach.com.
3. My Accounting Course (2018). What is direct labor? Taken from: myaccountingcourse.com.
4. Study (2018). Direct Labor: Definition & Cost Formula- Taken from: study.com.
5. International Financial Reporting Tool (2018). Direct Labor Cost. Taken from: readyratios.com.