What is Direct Labor?
Ahead of talking about how to calculate direct labor cost, lets define direct labor. Direct labor refers to the work done by employees that contribute directly to producing products or providing services. Additionally, some companies may categorize direct labor based on a specific product, cost center or work order.
What is Direct Labor Cost?
Direct labor cost refers to the salaries and wages paid to workers that can be directly attributed to specific finished products. It includes everything that goes into compensating an employee for manufacturing a specific product or providing a specific service, including:
- Payroll taxes
- Company-paid medical insurance
- Life insurance
- Workers’ compensation
- Company-matched pension contributions
- Standard benefits
- Fringe benefits
Identifying the individual cost factors that are attributed to produce a product is important in assessing labor inputs.
Formula to Calculate Direct Labor Cost.
Suppose you employ a direct labor workforce of 5 people, who work 40 hours per week, and they earn an average of $20 per hour. Determine the direct labor cost of each of the employee in a week.
Therefore, the direct labor cost is $ 800.
Calculate the company’s total direct labor costs for the month ending on February 28, 2023, if the wages paid to the employees for the work related directly to the manufacturing of the product is $ 200,000 and the health insurance premium paid on behalf of those employees who are engaged in the manufacturing of the product is $ 10,000.
Since both cost are directly related to the manufacturing, therefore, they fall in the direct labor cost.
Hence, the direct labor cost of the company will be the sum of these two costs.
= 200,000 + 10,000
Thus, the direct labor cost is $ 210,000
How to Lower Direct Labor Cost.
- Minimize absenteeism of the employees by instituting strategies that promote good attendance.
- Enforce time clock regulations.
- Finally, adjusting business operating procedures can also lower this cost.