The total labour cost can be classified as follows:
- Direct labour costs;
- Indirect labour costs.
Direct Labour Cost
It refers to all labour expended in altering the construction, composition, conformation or condition of the product. The wages paid to skilled and unskilled workers for his labour can be allocated specifically to the particular product or the process as the case may be. In any manufacturing process or department, the workers employed may be of the following two categories:
- Those who are directly engaged on the production or in the carrying out of an operation or process;
- Those who are assisting in the process by way of supervision, maintenance, transportation of materials, etc.
The workers coming under the first category constitute direct labour and the wages paid to them are called direct wages. In a factory, where production of a number of products is undertaken or in a jobbing concern, workers are given job cards on which they note the time devoted to each job or product. These job cards are then analyzed job wise so that the wages attributable to each job can be computed.
Direct labour cost is that portion of wages or salaries which can be identified with and charged to a single costing unit. It can be easily identified with and charged to a single costing unit as there is a direct relationship with the product/process. Direct labour cost can be easily calculated and is quite significant in amount.
Indirect Labour Costs
It refers to labour expended that does not alter the construction, conformation, composition or condition of the product, but which contributes generally to such work and to the completion of the product and its and handling up to the point of dispatch. In other words, labour employed for the purpose of carrying out tasks incidental to goods produced or services provided is regarded as indirect labour. Wages or salaries paid to foremen, supervisors, inspectors, clerks, store-keepers, managers, accountants, salesmen, directors, etc., are examples of indirect labour cost.
These costs are not easily identifiable with particular units of cost. Indirect labour cost can be classified as that expended in production departments and that in service departments. (Bulk of the labour cost in a production department will be direct). The classification should enable control over such costs and codification of indirect labour accounts.
Need for distinguishing between direct and indirect labour cost:
The distinction has to be made
- For calculating accurate labour cost and thus provide a basis for strict control;
- For facilitating calculation of labour efficiency;
- For proper allocation of overheads;
- For introduction of incentive schemes;
- For inter-unit comparison; and
- For estimating total labour costs.
