Direct Labor (Managerial Accounting)
What is indirect labor?
Here are more examples of indirect labor:
Employing indirect labor costs, businesses can add overhead costs to their goods and services. They can add the cost per unit sold to the total of all administrative expenses. This calculation helps businesses determine the total cost a customer will pay. Since you’re adding overhead costs to the production cost, this could result in an increase in a product’s price. To cover all indirect labor employees, a business may have to raise the price of a product.
What is direct labor?
The types of employee wages that are considered direct labor expenses vary depending on an organization’s nature. Employees who are directly involved in production make up direct labor in manufacturing businesses, including:
Direct labor in service-based businesses refers to personnel who render the services, such as:
How to calculate direct labor cost
Here are the steps to calculate direct labor costs:
1. Identify which expenses are direct labor expenses
2. Add direct labor expenses
Calculate the total cost of direct labor for the specified time period, taking into account:
3. Calculate hourly labor costs, if needed
By dividing the total direct labor costs for a given time period by the number of hours worked during that time, you can determine the per-hour direct labor cost.
For instance, if you find that an employee’s total direct labor costs are $60,000 annually and they work 2,000 hours (40 hours per week for 50 weeks of the year), you can calculate their direct labor cost per hour by dividing $60,000 by 2,000: $60,000/2,000 = $30 per hour.
4. Calculate labor costs for other time periods
With the per-hour direct labor cost in hand, you can use it to calculate the employee’s daily, weekly, monthly, and quarterly direct labor costs.
For instance, if an employee works 40 hours per week, the direct labor cost to the business is 40 x $30, or $1,200, for the week.
Direct labor examples
Here are several examples of using direct labor costs. In the first, finding hourly direct labor costs is demonstrated; in the second, calculating direct labor costs for a quarter is demonstrated.
Example 1
Brew Good Coffee produces and distributes whole bean coffee. 15 people work at the facility producing, packaging, and delivering bags of coffee. Owners of Brew Goods want to compute the hourly direct labor costs of the workers in their factory for the previous year.
The owners add up wages, benefits, and other contributions to arrive at the total costs for the 15 employees. The total cost of direct labor for the entire year is $750,000.
The business then calculates the total number of hours that factory workers worked during the previous year. For a total of 20,000 hours (10 x 40 x 50 = 20,000), ten employees worked 40 hours per week over 50 weeks. The other five workers put in a combined 8,400 hours over the course of 48 weeks at a rate of 35 hours per week (5 x 35 x 20). This results in a total of 28,400 hours worked (20,000 + 8,400).
Finally, Brew Good can calculate its per-hour direct labor cost by dividing the total direct labor costs by the total number of hours.
Direct labor expenses per hour equal $750,000 total direct labor expenses/28,400 hours, or $26. 41 per hour.
Example 2
Bright Blooms is a flower shop in a large city. Each quarter, the owner wants to calculate the direct labor costs for the business.
Six florists who create floral arrangements work for the business, along with two delivery drivers and two traveling floral consultants who assist with events. The florists earn a yearly salary of $45,000 each. The delivery drivers earn $25 per hour, while the floral consultants are paid $35 per hour.
In the previous quarter, the floral consultants each put in 120 hours per month, for a total of 360 hours per consultant. The two consultants collectively put in 720 hours during the quarter, earning a total of $25,200.
During the quarter, the delivery drivers put in a combined 960 hours, working 40 hours per week. At $25 per hour, they made $24,000.
The owner of Bright Blooms spends $200 per month on employee benefits and insurance in addition to employee wages. Benefits for the quarter will total $200 over the course of three months, or $600 for each employee. With 10 employees, the cost is $6,000.
The following expenses can be added together for the owner to determine direct labor costs for the quarter:
Costs of direct labor for a quarter are $122,700 ($67,500 + $25,200 + $24,00 + 6,000).
FAQ
What is direct labor example?
Any worker who is directly involved in a product’s manufacturing is referred to as direct labor. If your company manufactures bicycles, the bicycle-making employees are regarded as direct labor. Direct labor includes assemblers, welders, painters, and machinists.
What is direct and indirect labor?
While work performed on specific goods or services is considered direct labor, employee work that cannot be linked to or charged to the provision of services or goods is considered indirect labor.
What are examples of direct labor costs?
The hourly pay of a quality assurance inspector adjusted to include healthcare benefits and short-term disability is one illustration of a direct labor cost. A welder’s annual salary on the assembly line of a business that produces steel parts could serve as another illustration.
What is a direct labor employee?
Definition of Direct Labor Workers who work directly on a manufacturer’s goods are referred to as direct laborers. (Indirect labor refers to those who work in the production area but do not directly interact with the products. ).
