What are Direct Labor Costs?

Direct labor costs refer to the total cost incurred by the company for paying the wages and 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.

Components

The following components are included:

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

Calculation Examples

From the following information calculate the examples of total direct labor costs of the company for the month ending on September 30, 2019.

Popular Course in this category

All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)4.9 (1,067 ratings) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion

View Course

Wages paid to the employees for the work-related directly to the manufacturing of the product: $ 150,000
Raw material purchased $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 who are engaged in the manufacturing of the product will be included in the direct labor costs.
The raw material will be considered in the direct material cost, and the Wages paid to the employees for the work that is not related directly to the manufacturing of the product will be part of the indirect labor cost.

This will be calculated as follows:

Advantages

Segregating the direct labor cost from the total labor costs helps in knowing the total wages or 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 provision of the services. And the cost labor cost left after deducting this cost out of the total labor costs will be the indirect labor cost of the company.
It is one of the significant components of the product cost of the company, 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.

Disadvantages

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.

Important Points

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.
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 the 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 amount paid, which are directly related to the products such as payroll taxes that associated with employee wages, workers’ compensation insurance, life insurance, medical insurance, and the other company benefits.

Conclusion

Direct labor cost is one of the significant components of the product cost of the company. It includes total paid as wages or the other benefits to the employees of the company who are related directly to the manufacturing of the product of the company or for the provision of the services.
The cost of the direct labor incurred by the company during the period is required to calculate the product cost of the company where the amount paid to workers that are working in the company but are not involved directly with the product of the company is not to be considered.

Direct Labor Costs