7 junio, 2024

Direct labor: what it is, characteristics, examples

what is the direct labor?

The direct labor It is the workforce that is directly involved in the production and transformation of a product to turn it into goods and services.

When a company manufactures products, direct labor is considered the labor of production personnel who directly produce the goods. For example, machine operators, assembly line operators, painters, etc. Also field workers in the agricultural sector.

If a business provides services, direct labor is considered the labor of those individuals who directly provide service to customers. For example, consultants and lawyers.

In general, a person who is charging billable time to a client is working direct labor hours.

Direct labor cost is generally considered the cost of normal hours. They are also differentials for shifts and overtime worked by workers. Similarly, the amounts related to payroll taxes.

Characteristics of direct labor

It is the amount of effort exerted by employees to convert raw materials into finished products. In other words, what the manufacturer sells is the labor of the employees.
This work can be traced directly to the products they help produce. For example, a welder, machinist, or painter help produce a specific product. Direct labor is often referred to as direct cost rather than effort.
Contrast with indirect labor costs, which cannot be assigned to a single product. For example, workers who help machine operators clean their machines cannot be assigned their work to only one product, because they do not actually produce anything.
Management keeps track of direct labor costs and allocates them to the products they help produce. For example, an assembly line worker at a Ford Motor plant who bends fender parts not only helps produce the overall vehicle, but also produces the fender itself.
Direct labor cost does not include employees who are not involved in production, such as administrative staff members. It is only made up of the personnel responsible for production.
It is related to the amount that is spent in the manufacture of the final product. This includes both direct labor and direct material costs.

How to measure direct labor cost?

To accurately measure the cost of direct labor, an entity must consider all expenses and not just wages.

Therefore, the entity will generally include the cost related to social security paid by the employer. Likewise, taxes related to unemployment and medical assistance expenses. There is also insurance related to worker’s compensation and contributions to the pension plan into consideration.

Companies may also have to consider allocating an amount for the hiring and training of workers. This way they will be able to arrive at the total cost of labor.

Direct Labor Cost Calculation

To calculate direct labor cost, entities must ensure that every detail is included. This essentially represents a cost to them in terms of hiring and keeping an employee.

The company must establish a standard rate or template in order to analyze direct labor cost effectively. This rate is usually an estimate of what the company expects direct labor cost to be under normal conditions.

So there are basically two main components of this particular model. The estimated cost of one hour of direct labor, as well as the number of hours a labor force spends producing a unit of product.

For example, a company’s total labor cost for one hour is $15, and it expects to spend 0.5 hours on each unit during production. If you make 1,000 units per week, then your standard labor cost will be $7,500.

examples

Workers who harvest certain fruits and vegetables. Workers in a construction company. Seamstresses in a garment manufacturing company. Electrical technicians at a power company. Consultants in a consulting firm. Programmers at a programming company. Sellers in a store. Carpenters in a carpentry. Workers making cloth in a cloth factory. Workers milking cows on a family farm, to produce cheese and yoghurt.

References

Direct labor. Retrieved from accountingtools.com.
What is direct labor? Retrieved from accountingcoach.com.

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