Direct Labor Cost

Direct labor is a type of work that is directly associated with the production of a good or service. It includes only those who operate the machines or perform the tasks that result in the production of goods are included. There direct labor cost is the cost of personnel that can be identified in the product, such as the salary of the person who works at the production machine, but not the administrator's or janitor's salary.

The direct labor cost is the cost of wage-bill or payroll that can be specifically and consistently assigned to or associated with the manufacture of a product, a particular work order, or provision of a service.  The direct labor costs differ from one factory or company to another depending upon the nature of production. The type of labor is directly related to the manufacturing of the products in the company. Some of the direct labor costs are wages, payment for subsidized food, subsidized housing, educational benefits to the children of the workers and other benefits which include bonuses, allowances and perks etc.

The calculation of direct labor cost does not include just the payment of wages but also how it impact the company’s insurance premiums, benefits costs, payroll tax contributions, etc. There are several steps involved in calculating the direct labor cost. Firstly the total wages of the employees is calculated. Next the costs that is associated with the employees and  their pension is analyzed. The company’s health insurance cost per employee is calculated. The total cost the company that must paid in workers compensation premiums is also included. Also the employer contribution for the taxes that should be paid for each employee is included. The additional costs associated with hiring employees, such as advertising open positions or hiring a headhunter is included for the calculation. Finally all these category costs bring up the total direct labor cost.

Questions

• What is direct labor cost?
• What are the steps involved in calculating the direct labor cost?