What is direct labor?
Direct labor is important to anyone who runs a business, so "What is direct labor?" Read on, we will discuss what direct labor is, and what it means for your company or organization.
Basically, direct labor consists of the labor or the staff that is part of the particular production for a specific process. The personnel is only considered to be direct labor if his or her paycheck is able to be specifically connected to the output of that process and if in your accounting you include that paycheck in your cost of goods sold. Direct labor personnel would be people like the person who operates the machines on your line, or the person who runs the candy coating machine in your M & M shop. The cost of direct labor is how much you pay the direct labor per hour of actual direct labor work. Direct labor should be differentiated from indirect labor when you are working up your budget and determining production costs. Indirect labor is the personnel that supports the process, like your company secretary or your company accountant or personnel along those lines. Direct labor is considered to be an inventoriable cost, which means that you count it on your inventory when you are figuring out the cost of your procedure and the cost of goods sold.
|
|
When you are looking at your internal accounting procedures, you need to realize that if you are paying your direct labor an hourly cost, that wage is going to be considered as a fixed cost. It's a fixed cost because you as the owner or the manager is not going to change the amount of money that you pay the worker per hour, unless you decide to, just like you will not change the salary of a contracted worker, unless you decide to. However, you will also probably be raising the wage or the salary of your workers as your business' activity goes up, keeping the wage in the same relation to the activity of your company.
When you are figuring out your budget and deciding where to bill certain costs, the cost of direct labor should be billed to the production department where the direct labor personnel works.
You also need to consider direct labor variances when you are looking at your budgets. The direct labor variance is the difference between the actual cost of the direct labor and the standard direct cost. Or, in other words, the direct labor variance is the sum of the direct labor efficiency variance and the direct labor rate variance.
Confused already? Let's go over what the direct labor rate variance and the direct labor rate variance are. The direct labor rate variance is what you get when you subtract the actual direct labor rate from the standard direct labor rate, and then you multiply the difference by how many direct labor hours were actually worked. The direct labor efficiency variance is what you get when you subtract the standard direct labor hours-making allowance for the units that are produced-and the actual direct labor hours worked. You then multiply the answer that you get by the standard direct labor rate.
When you work through all of these equations, then you will be able to tell how much you are paying for your direct labor, you will be able to determine the variance between the wage that you are paying your direct labor and the standard price of direct labor. This can also help you decide if you should raise the wages of your direct labor personnel and what the variances are in your direct labor wages compared to the total cost of goods sold and the overall activity of your company.
