Direct labor cost

Direct labor costs are costs that can be precisely and unambiguously attributed to a given cost object. Physical observation can be used to measure the quantity of labor used to produce a specific product or provide a service. The direct labor cost of making a product includes the cost of transforming raw materials into a product

Direct labor costs in general

Costs that are assigned to cost objects can be divided into two broad categories and can be further divided into four subcateogies:

• Direct costs;
• Indirect costs.

Both categories can be further divided into:

• Direct and indirect materials;
• Direct and indirect labor costs.

In this article the direct labor costs are discussed. Direct labor costs are costs that can be specifically and exclusively identified with a particular cost object.

More in detail direct labor cost is the total wages or salaries paid to direct labor personnel. Direct labor cost should include basic compensation, production efficiency bonuses, and the employer’s share of Social Security and Medicare taxes. Additionally, if a company’s operations are relatively stable, direct labor cost should include all employer- paid insurance costs, holiday and vacation pay, and pension and other retirement benefits.

Identifying direct labor costs

Direct labor costs consist of chargeable hours that can be specifically identified with individual customers. To help to track direct labor costs, different methods can be used, for example, job cards and time sheets.

• Job cards are a source document that records the amount of time spent on a particular task and the employee's hourly rate so that direct labor charges can be assigned to the relevant cost object.

• Time sheets are source documents that record the time an employee spent on specific duties and can be used to assign direct labor costs to the proper cost object.

The role of direct labor costs on decision making

Determining the direct labor costs that are relevant to short-term decisions depends on the circumstances. When a corporation has temporary excess capacity and the labour force has to be maintained in the short term, the direct labour cost will be the same regardless of the alternative decision made. Therefore, the direct labour cost will be irrelevant for short-term decision-making. In contrast, when casual labour is utilized and workers can be employed on a daily basis, a corporation can change the employment of labour to the exact level required to satisfy production demands. The cost of labour will rise if the company takes extra work and fall if production decreases. In this circumstance, the labour cost will be an important factor in decision-making. When total capacity exists, and additional labor supplies are not accessible soon, there is a severe labour shortage.

References

• Drury, C. (2017). Management and Cost Accounting. Cengage Learning.
• Jain P., Bhati A. (2015), Cost Accounting and Cost Control System in Textile Industry in India, Department of Accountancy and Business Statistics, Jaipur
• Kinney, R., M., & A. Raiborn, C. (2011). Cost Accounting: Foundations and Evolutions, Eighth Edition. Cengage Learning.

Author: Annija Petersone

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