Cost Accounting

What is Direct Labour in Costing?

Direct labour is the cost of the labour used to produce a product or service. It includes all wages, salaries, and other forms of employee compensation, such as benefits.

In simple words, it is labour that can be conveniently identified or attributed wholly to a particular job, product, or process or expended in converting raw materials into finished goods.

Another definition that can be used to define direct labour is “labour that is engaged in the conversion of raw materials into finished goods.” It is always attributable to a particular activity.

Wages of such labour are known as direct wages. Thus, it includes payment made to the following groups of labour:

(i) Labour engaged in the production of the product or carrying out an operation or process.

(ii) Labour engaged in aiding the manufacture by supervision, maintenance, tool sets, transportation of materials etc.

(iii) inspector, analysts, etc., especially required for such productions.

The wages paid to supervisors, inspectors, etc., though not direct labour, can be treated as direct labour if they are directly engaged in a specific product or process. The hours they spend on it can be directly measured without much effort. Similarly, where the cost is not significant, like the wages of trainees or apprentices, their labour directly spent on a product is not treated as direct labour. The main problem that cost accountants have to face is that, in the case of indirect labour, they have to allocate the appropriate amount in the form of overheads, while in the case of direct labour, no such problem arises.

The Impact of Direct Labour Costs

Direct labour is a variable cost, which means that it fluctuates with changes in production volume. For example, if a company produces more products, it will need more workers and will incur higher direct labour costs.

Direct labour cost proportionately affects the cost per unit of the product. Companies use direct labour cost to calculate the labour cost per unit of production. This information is useful in pricing products and services and making decisions about production efficiency.

Although the direct labour cost is variable in nature, it is also fixed because the firm has to incur the cost irrespective of the quality of the goods produced.

Finally, companies can change the mix of employees to include a greater proportion of lower-paid workers. This strategy is often used in manufacturing, where production line workers are paid relatively low wages.

Reducing direct labour costs is important for companies to increase profitability and competitiveness.

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