Labour can be direct as well as indirect. Direct labour is that which can be charged to specific cost units directly. Indirect labour is one the direct allocation of which is not possible.
If wages can be allocated to different jobs or products on a convenient basis and are paid to workers engaged directly in the fabrication of products, the wages are direct. The wages are indirect when the workers are not directly engaged in the manufacturing of products and the wages cannot be identified to particular jobs or products.
The examples of indirect labour are wages paid to supervisors, workmen, chowkidars, inspectors, material handlers, time-keepers, foremen, watchmen, cleaners, etc. The example of direct labour is wages paid to workmen put on definite jobs or products in the factory.
Learn about labour cost classification – 1. Direct Labour Cost 2. Indirect Labour Cost.
Labour Cost: Direct Labour Cost and Indirect Labour Cost (With Meaning, Types, Classification, Accounting, Control, Examples, Differences, Features, Labour Cost Per Unit and More..)
Labour Cost – Direct Labour Cost 2. Indirect Labour Cost
The term labour is defined and interpreted by different authors in different ways depending upon various aspects including the need and circumstances. Anyhow, all these are unanimous in stating labour as human service i.e., effort put in by the employees or workers for productive purposes and/ or for revenue generating activities.
Labour cost, therefore, denotes the remuneration (both direct and indirect) paid by the employer-organizations to their employees to obtain their service. The labour cost is normally classified into two categories on the basis of its identifiability with the cost unit.
They are:
1. Direct labour cost, and
2. Indirect labour cost.
1. Direct Labour Cost:
Direct Labour represents the labour which is directly engaged in the production of goods and services. Hence, the quantum of labour effort put in by the employees can be identified with the Cost Unit. Therefore, Direct Labour Cost refers to that portion of wages which can be identified with, and charged to, Cost Unit.
2. Indirect Labour Cost:
On the other hand, Indirect Labour represents the labour which is not directly engaged in the production of goods and services but helps indirectly the (Direct Labour engaged in) manufacturing activities.
Hence, Indirect Labour Cost refers to the labour cost which is not easily identifiable with, and chargeable to, a Cost Unit, but which can be apportioned to, and absorbed by, a Cost Centre.
Repairers, Time-keepers, Supervisors, Mechanics, Cleaners, etc., are examples of indirect labour and therefore, their salaries and wages are examples of Indirect Labour Cost which is a part of overhead expenses.
What is Labour Cost – Direct and Indirect Labour (With Examples)
Direct and Indirect Labour:
Labour can be direct as well as indirect.
(a) Direct Labour
The labour spent in altering the construction, composition and condition of the product is known as Direct Labour. It must be directly identifiable with the products so that direct allocation to the cost centre or cost unit is possible.
Examples of direct labour are operators in the production process, operators directly engaged in manufacturing jobs, workers in assembly lines etc.
(b) Indirect Labour
Indirect Labour is that labour which is not directly engaged in the production of goods and services but which indirectly helps the direct labour engaged in production.
The examples of indirect labour are supervisors, sweepers, watchmen, time-keeper, repairers etc. The cost of indirect labour cannot be conveniently allocated to a particular job, order or process.
The line of demarcation between direct and indirect labour is very thin. For example wages paid to a foreman at a fixed point of production are direct. On the other hand, if he is engaged in repairing various machines in the factory—thereby making identification difficult and costly-his wages would be indirect.
Nevertheless, this distinction is essential because
(i) direct labour is part and parcel of prime cost whereas indirect labour costs are treated as overheads;
(ii) it helps in preparing labour cost estimates;
(iii) it facilitates introduction of incentive schemes and
(iv) it prevents errors in the allocation of overheads.
Labour Cost Classification – Direct and Indirect Labour Cost (With Differences)
Labour cost is the second major element of cost especially in undertakings using more manual operations. Hence proper accounting and control of labour cost should be made. This is achieved by balancing productivity with wages. Higher wages for higher productivity reduce labour cost per unit as well as overheads expense per unit.
Once recruited, it is very difficult to remove a worker, and hence the management must make best use of him by imparting proper training, giving better tools, providing healthy/working conditions and better wages.
For effective managerial control over labour cost techniques like production planning, labour budget, labour standards, labour performance report, labour cost accounting, effectiveness of wage incentive schemes, etc., may be adopted.
Direct and Indirect Labour Cost:
For the purpose of accounting labour cost may be classified into
(1) Direct labour cost, and
(2) Indirect labour cost.
i. Direct labour cost
Direct labour cost is the cost of all labour expended for changing the construction, composition, or condition of the product. It is that portion of employee remuneration which can be conveniently identified with and charged to a particular job, product, process or operation.
Labour cost is treated as direct cost when
(1) there is direct relationship between labour cost and the product, process or cost unit;
(2) labour cost may be measured on the basis of this relationship; and
(3) labour cost is considerable.
It varies directly with the volume of output. Wages paid to the workmen engaged in machine shop, assembly shop, etc., are examples of direct labour cost.
ii. Indirect labour cost
Indirect labour costs are not identifiable with the production of specific goods or services. Salaries and wages paid to inspectors, foremen, maintenance staff, purchase assistants, security staff, canteen staff, material handling, medical centres, stores and offices, etc., are examples of indirect labour cost. Workers engaged in productive jobs or processes are called direct workers. Idle time, waiting time, machine repairing time, etc., of direct workers shall be treated as indirect labour.
Difference between direct and indirect labour:
The distinction between direct and indirect labour depends on the nature of work, practicability and expediency. Direct labour cost forms part of the prime cost whereas indirect labour cost is a part of overhead expenses. Direct labour cost can be controlled easily but indirect labour cost can be controlled only by comparing actuals with departmental budgets.
Identification of direct and indirect labour costs is important for
(i) determining accurate product cost, marginal cost and contribution of products;
(ii) measuring efficiency of performance;
(iii) preparing information regarding labour cost analysis, and
(iv) avoiding errors in overhead allocation.
Indirect labour costs are accumulated arid apportioned to various cost centres on equitable basis and absorbed into product cost through overhead absorption rates.
What is Direct Labour and Indirect Labour?
Direct and Indirect Labour:
Labour can be direct as well as indirect. Direct labour is that which can be charged to specific cost units directly. Indirect labour is one the direct allocation of which is not possible. If wages can be allocated to different jobs or products on a convenient basis and are paid to workers engaged directly in the fabrication of products, the wages are direct.
The wages are indirect when the workers are not directly engaged in the manufacturing of products and the wages cannot be identified to particular jobs or products.
The examples of indirect labour are wages paid to supervisors, workmen, chowkidars, inspectors, material handlers, time-keepers, foremen, watchmen, cleaners, etc. The example of direct labour is wages paid to workmen put on definite jobs or products in the factory.
Sometimes, it is difficult to distinguish between direct labour and indirect labour. A worker might be engaged in doing a particular work concerned with manufacturing a commodity and after an hour the same worker might be placed on a different job concerned with, say, time-keeping or repairing.
In such a case the wages paid for the first hour should be treated as direct and for the rest of the period, indirect. It is to be noted that the classification of labour between direct and indirect also depends upon the criteria laid down by the management for the work and nature of the industry.
The distinction must be observed because direct labour is a part of Prime Cost of Production whereas indirect labour is treated as Factory Overhead and, therefore, included under Works or Factory Cost.
Notes on Labour Cost – Direct and Indirect Labour Cost
Labour cost can be divided into two types:
i. Direct labour and
ii. Indirect labour.
i. Direct Labour:
According to ICMA, “Direct Labour cost is that cost which can be identified with and allocated to cost centers or cost units”. Again, “the cost of remuneration for employee’s effects and skills is applied directly to a product or a saleable service.”
The labour spent in altering the construction, composition, or condition of product i.e. converting raw material into finished product, is known as Direct Labour. The direct labour cost can easily be identified and allocated to cost units. It varies directly with production, thus creating closeness to production.
ii. Indirect Labour:
On the other hand, indirect labour cannot be conveniently identified with cost unit or cost center. ICMA defines wages as “cost other than direct wages cost.”
Therefore, indirect labour cost is the amount of wages paid to workmen, who are not engaged in the production of goods or services, but at the same time, indirectly help the direct labour. In short, wages paid to such workers cannot be identified with any particular work.
Examples of indirect labour cost are wages paid to supervisors, inspectors, foremen, watchmen, time-keepers, repairers, cleaners etc. If a worker is employed to perform a job a day, the remuneration is treated as direct wages, when his job is identical to the job assigned.
If not, it is indirect wages. One distinction is that direct labour cost, charged to a job, forms part of prime cost, whereas indirect cost becomes a part of overhead.
Labour Cost Types – Direct and Indirect Labour
Labour can be of two types:
(a) Direct Labour, and
(b) Indirect Labour.
(a) Direct Labour:
Direct labour is the labour which is directly engaged in the production of goods or services. In other words, the labour spent in altering the construction, composition and condition of the product is known as Direct Labour.
Examples of direct labour are a carpenter engaged in making furniture; a worker working on machine, a weaver weaving cloth, a shoemaker making shoes, operators directly engaged in manufacturing jobs, etc.
(b) Indirect Labour:
Indirect labour is that labour which is not directly engaged in the production of goods and services but which indirectly helps the direct labour engaged in production.
The examples of indirect labour are sweepers, foreman, watchman, timekeeper, cleaners, repairers, etc. The cost of indirect labour cannot be conveniently allocated to a particular job, order or process.
The wages paid to a gardener is an indirect labour cost as he helps to make the factory environment green and clean which helps all the workers to enjoy better and natural surroundings.
Labour Cost Classification
The labour cost can be classified into two type’s viz.:
(1) Direct Labour Cost:
Direct labour is all labour expended in altering the construction, composition or condition of the product. For example, Wages paid to machine operator, Wages paid to shoemaker, Tailor, Baker, Carpenter etc.,
According to I.C.M.A. London “Direct labour cost is that cost which can be identified with and allocated to cost centers and cost units”.
(2) Indirect Labour Cost:
The labour charges which cannot be attributable to a particular cost unit or cost center is indirect labour cost. They are attributable to or absorbed by cost centers. Example Salaries of foreman, helpers, store keeper, Cleaner, inspector, clerk, peon, supervisor etc.
Indirect labour is of general character and cannot be conveniently identified with a particular cost unit. It helps production indirectly.
Labour Cost – With Meaning and Examples
Labour refers to the human element in production. No business activity is possible without the help of labour. Materials are converted into finished products with the help of labour. Thus, Labour is one of the most important factors of production. Labour cost constitutes a significant portion of the total cost of a product.
In a broad sense, the term “labour cost” comprises only wages that have been paid to an employee. But, in fact, it includes the monetary benefits like wages, dearness allowance, leave salary, etc., and non-monetary benefits like medical, educational, recreational facilities etc.
(a) Direct Labour Cost:
Labour cost may be divided into direct and indirect. According to C.I.M.A. London it is “the cost of remuneration for an employee’s efforts and skills applied directly to a product or saleable service”. For example, in furniture making, the wages paid to the carpenter is direct labour cost.
(b) Indirect Labour Cost:
According to C.I.M.A. London, Indirect labour cost means “wages cost other than direct wages”. In other words, which cannot be directly identified with cost units are termed as indirect labour cost.
E.g. Wages paid to the supervisor, watchman assistant, etc. They are helping different departments and therefore, their wages cannot be identified with a cost unit. It is treated as indirect labour cost.
Labour Cost Classification – Based on Variability and Controllability
Labour cost incurred by a company is divided into two categories based on variability and controllability, viz.:
1. Direct labour cost and indirect labour cost and
2. Controllable and non-controllable labour cost.
a. Direct Labour Cost:
Direct labour cost is that portion of wages or salaries which can be identified with and charged to a single costing unit.
Labour cost will be classified as direct cost when
(i) there is a direct relationship between labour cost and the product or process or cost unit,
(ii) labour cost may be measured in the light of this relationship, and
(iii) labour cost is sufficiently material in amount.
b. Indirect Labour Cost:
Indirect labour costs are costs which are not identifiable with (or incurred directly) in the production of specific goods or services. These labour costs are commonly used for production activities.
Indirect labour cost consists of labour costs in service departments such as purchasing, engineering and time-keeping. Labour cost of certain workers in the production departments will also come in the category of indirect labour cost like foramen, material expediters and clerical assistants.
The auxiliary labour for store-room, factory office and maintenance will also be categorised as indirect labour.
For control purposes, the indirect labour can be further subdivided into
(a) Service groups like Cafeteria, Elevator operators, Laundry, Maintenance of plant and equipment,
(b) Supervisory control and engineering groups like Plant management, Industrial engineering, Medical and dispensary,
Cost Accounting, Purchasing, Tool design, Traffic, Quality control and Timekeeping.
(c) Others—indirect costs, excess labour, i.e., variation between productive wages payable and the standard labour cost of the production of these employees, cost of repairing and reconditioning the product, idle time of production operators. While direct labour cost forms part of prime cost, indirect labour cost becomes part of overhead.
Labour Cost and Control of Labour Cost
Labour or labour cost has been classified as:
1. Direct labour cost and
2. Indirect labour cost.
Such a classification enables better understanding and control of labour cost.
1. Direct Labour Cost:
This is the amount of remuneration paid to workers who are directly engaged or involved in production. This labour is spent on altering the construction, composition or condition of the product, or in other words converting raw materials into finished goods.
Such labour cost can be conveniently identified with a specific job, contract or work order. This labourer also varies directly with the volume of production. Direct labour cost is always included as a part of prime cost.
Examples- Labour engaged in the construction of buildings, workers directly engaged in production, services of a tailor.
2. Indirect Labour Cost:
This is the amount of remuneration paid to workers who are not directly engaged or involved in production. This labour merely assists the direct labour in the discharge of its function.
Such labour cannot be conveniently identified with a specific job, contract or work order. This labour does not vary directly with the volume of production. Indirect labour cost is not included as a part of prime cost.
Examples- Accountants, security personnel, personnel working in the public relations department etc.
The amount of indirect labour cost is treated as an overhead and is included in the cost sheet under factory overheads, or office and administration overheads or selling and distribution overheads depending on its nature.
Labour Cost – With Examples and Differences
Labour cost may be basically divided into direct and indirect costs.
(a) Direct Labour Cost
Direct labour cost is the remuneration paid to the employees who are directly engaged in the manufacturing operations or the conversion of raw materials into finished products.
Examples of direct labour cost include wages paid to the workmen directly put on the job such as a carpenter converting a log of wood into a table in a furniture industry, a machinist working on the lathe in a steel foundry, a workman printing the cloth in a textile unit, etc.
(b) Indirect Labour Cost
Indirect labour cost is the remuneration of those employees who are not directly connected with manufacturing operations. In other words, labour that cannot be identified with a particular job or product is indirect labour.
Examples of indirect labour cost include wages paid to supervisors, repair workmen, inspectors, material handlers, time keepers, foremen, cleaners, etc.
The difference between direct and indirect labour costs is essential because:
1. Direct labour costs are part and parcel of prime cost, whereas indirect labour costs are treated as overheads.
2 It helps in preparing labour cost estimates.
3. It facilitates introduction of incentive schemes.
4. It prevents errors in the allocation of overheads.
Labour Cost Classification
Labour is of two types:
(a) Direct labour,
(b) Indirect labour.
(a) Direct Labour:
Direct Labour is that labour which is directly engaged in the production of goods or services and which can be conveniently allocated to the job, process or commodity or process. For example labour engaged in the spinning department can be conveniently allocated to the spinning process.
(b) Indirect Labour:
Indirect Labour is that labour which is not directly engaged in the production of goods and services but which indirectly helps the direct labour engaged in production. The examples of indirect labour are supervisors, sweepers, cleaners, time-keepers, watchmen etc. The cost of indirect labour cannot be conveniently allocated to a particular job, order, process or article.
The distinction between direct and indirect labour must be observed carefully because payment of direct labour is a direct expenditure and is a part of prime cost whereas payment of indirect labour is an item of indirect expenditure and is shown as works, office, selling and distribution expenditure according to the nature of the time spent by the indirect worker.
Labour Cost – Direct and Indirect Labour Cost
Labour cost is classified into:
1. Direct labour and
2. Indirect labour.
1. Direct Labour:
Remuneration paid to employees who are directly engaged in conversion of raw materials into finished products is direct labour cost. Direct labour cost is identifiable and allocated to a particular product or division or department in a company.
2. Indirect Labour:
Remuneration paid to all employees who are not directly connected with production is indirect labour cost. It includes remuneration paid to people engaged in providing various supporting services like security service, timekeeping, canteen, stores, warehousing, office, etc. Indirect labour cost is not directly related to production function and cannot be identified with a product, process or division in a company.
Notes on Direct and Indirect Labour Cost
For costing purpose labour may be of two types:
1. Direct labour and
2. Indirect labour.
1. Direct Labour:
It is the labour which can be easily identified with the production process. Direct labour is directly engaged in the production process i.e., converting raw material into finished goods. Direct labour varies directly with production and thus can be controlled.
E.g., Labour employed in construction, carpenter, Tailor etc.
Wages paid to direct labour are included in prime cost.
2. Indirect Labour:
It is the labour which cannot be easily identified with the production process. It includes those people who are indirectly engaged in the production process.
E.g. wages paid to supervisors, cleaners, Inspectors, chowkidars etc.
Wages paid indirect labour are included in overheads.
Labour Cost Classification – Direct and Indirect Labour Cost (With Differences)
Labour cost is further divided into the following:
1) Direct Labour:
All the workers who are directly engaged in a manufacturing activity such as operating machines, doing assembly work etc., are known as direct workers and wages paid to them are known as – ‘Direct Labour Cost’. These wages can be conveniently identified with a particular product, job or process.
For ascertaining direct labour cost, it is necessary to know how much and what work has been done by an individual worker. For this purpose, various records should be maintained by the management. Wages of skilled and unskilled labour may be included in this item.
Examples of direct labour are – Baker, Shoe-maker, Carpenter, Weaver, Tailor, Bus Drivers and Conductors etc.
2) Indirect Labour:
It is of a general character and cannot be conveniently identified with a particular cost unit. In other words, indirect labour is not directly engaged in the production operations, but only to assist or help in production operations. Thus, the wages which cannot be allocated but which can be apportioned or absorbed by cost centres or cost unit is known as Indirect Labour.
Examples of indirect labour are – salaries and wages paid to foreman, supervisors, charge man, inspectors, clerical staff etc., working in production department, overtime and night shift allowance paid and any other benefits paid to them.
Following are the points of differences between direct labour and indirect labour:
Direct Labour:
i) It consists of wages paid to workers directly engaged in converting raw materials into finished products.
ii) These wages can be conveniently identified with a particular product, job or process.
iii) Wages paid to Baker, Shoe-maker, Carpenter, Weaver and Tailor are examples of Direct Labour.
iv) ‘All labour expended in altering the construction, composition, confirmation or condition of the product’ is known as Direct Labour.
Indirect Labour:
i) They are not directly engaged in the production operations but only assist or help in production operations.
ii) They are of a general character and cannot be conveniently identified with a particular cost unit.
iii) Wages paid to Supervisor, Inspector, Cleaner, Clerk, Peon, Watchman are examples of Indirect Labour.
iv) The wages which cannot be allocated, but which can be apportioned to or absorbed by cost centres or cost units is known as Indirect Labour.
Notes on the Classification of Labour Cost
Labour can be classified into two categories i.e.:
(i) Direct labour, and
(ii) Indirect labour.
(i) Direct Labour:
Direct labour is that which is directly engaged in production work and can be conveniently identified or attributed wholly to a particular job, process or cost unit. The labour of carpenters in the making of wooden furniture, the labour of bakers in the preparation of bread, the labour of tailors in the preparation of dresses, the labour of drivers and conductor in bus services, etc., are example of direct labour, as their labour is directly utilised for production.
Further, the labour operators of machines used for production, the labour of assembly men engaged in the assembling of the parts into the finished product, etc. are also examples of direct labour.
Again, even the labour of supervisors engaged in the supervision of a particular work and the labour of inspectors engaged in the inspection of any particular work are also examples of direct labour The wages paid to direct labour are called direct wages, productive wages, process wages, manufacturing wages, etc. Direct wages form part of prime cost.
(ii) Indirect Labour:
Indirect labour refers to that labour which cannot be conveniently identified with a particular cost centre or cost unit, but can be apportioned to different cost centres or cost units.
In other words, it is the labour that is not directly concerned with the production but helps the direct labour engage in production indirect labour includes the following:
(i) Labour of watch and ward
(ii) Labour of repair and maintenance staff
(iii) Labour of supervisory staff like supervisors, foremen and inspectors
(iv) Labour of higher executives like, production manager
(v) Labour of stores personnel
(vi) Labour of purchasing department staff
(vii) Labour of material handling staff
(viii) Labour of crane operator
(ix) Labour of truck drivers
(x) Labour of clerical staff
(xi) Labour of engineering department staff
(xii) Labour of staff engaged in generation of power, water supply, etc.
The wages paid to indirect labour are called indirect wages or indirect labour cost. The indirect labour cost forms part of overheads either factory overheads or administrative overheads or selling and distribution overheads.
Labour Cost Classification
Labour is also classified into:
(a) Direct labour, and
(b) Indirect labour.
(a) Direct Labour:
Direct labour cost is cost of labour expended in altering the construction, composition or condition of the product. Direct labour cost is easily identified and allocated to cost units. It fluctuates in proportion to output. It can be easily ascertained and allocated because of its close relationship with the output.
(b) Indirect Labour:
Indirect labour cost is the amount of wages paid to workmen who are not directly involved in altering the composition of the product. Examples of indirect labour cost are remuneration to sweepers, helpers, watchmen, mechanics and supervisors. The indirect labour cost cannot be identified and allocated to cost units.
Strictly speaking the main difference between direct and indirect labour cost is based not only on the nature of work done but also on the basis of practicability and expediency. If a particular worker spends considerable time on a specific job which makes the identification of his time to the job practicable the wages of the worker becomes direct.
If both of these conditions are not satisfied the worker’s wages becomes indirect. Direct labour cost forms part of prime cost, whereas indirect labour cost forms part of overheads.
The distinction between direct and indirect labour cost is very important. Direct labour is variable and effectively controlled. Indirect labour can be controlled through labour budgets and comparing actual indirect labour cost with budgeted indirect labour.
Labour Cost – Direct and Indirect Labour Cost (With Features and Examples)
The items of labour are classified broadly into two categories:
1. Direct Labour:
Direct labour implies the labour that can be readily identified with a specific job, contract or work order.
It includes the following:
(i) Labour Employed In Conversion of Raw Materials into Finished Goods. All labour directly engaged in converting raw materials into finished goods or in altering the construction, composition or condition of the product.
(ii) Labour Employed In Particular Job. Any other form of labour which is incurred wholly or specifically for any particular job, contract or work order.
ICMA opines, “Direct labour cost is that cost which can be identified with and allocated to cost centres or cost units.”
Again, “the cost of remuneration for employee’s effects and skills is applied directly to a product or a saleable service.” The labour spent in altering the construction, composition or condition of product, i.e., converting raw material into finished product is known as Direct Labour.
Features Main features of direct labour are:
(i) Easy Identification – It can be easily identified with a specific job, contract or work order.
(ii) Variation – It varies directly with the volume of output.
Some examples of direct labour are:
(i) Halwai in confectionery unit.
(ii) Washer in Dry cleaning unit.
(iii) Carpenter in furniture unit.
(iv) Weaver in weaving unit.
(v) Baker in Baking unit.
(vi) Tailor in Readymade wears unit.
(vii) Labour employed on construction contract.
Treatment Wages paid to direct Labour are termed as ‘direct labour cost’ and form part of prime cost.
2. Indirect Labour:
Indirect labour implies the labour that cannot be readily identified with a specific job, contract or work order. Indirect labour is inclusive of all labour not directly engaged in converting raw materials into finished goods or in altering the construction, composition or condition of the product.
ICMA opines wages as, “Cost other than direct wages cost.” Therefore, indirect labour cost is the amount of wages paid to workmen, who are not engaged in the production of goods or services, but at the same time, indirectly help the direct labour.
Features:
Main features indirect labour are as under:
(i) Not Identifiable – It cannot be easily identified with a specific job, contract or work order.
(ii) No Variation – It may or may not vary directly with the volume of output.
The labour employed in the following are examples of indirect labour such as:
(i) In security department.
(ii) In cost accounting department.
(iii) In stores department.
(iv) In repairs and maintenance department.
(v) In power house department.
(vi) In time-keeping department.
(vii) In payroll department.
(viii) In machine shop such as tools setters, fitters, cleaners.
(ix) In personnel department.
(x) In engineering and work study department.
Treatment Wages paid to indirect labour are termed as ‘indirect labour cost’ and are treated as part of overheads.