Use this Direct Labour Cost Calculator to quickly determine the core labour cost for a specific product or project, and calculate the fully loaded cost including employer benefits and overhead.
Direct Labour Cost Calculation
Calculation Steps
Direct Labour Cost Calculation Formula
$$ \text{Fully Loaded Labour Cost} = \text{Direct Labour Cost} \times (1 + \text{Overhead Percentage}) $$
Variables Explained
- Total Direct Labour Hours: The number of hours employees spent directly working on the production of a specific product or the delivery of a service.
- Hourly Wage Rate: The base compensation paid to the employee per hour, excluding benefits or payroll taxes.
- Labour Overhead / Benefit Percentage: The percentage added to the base wage to cover associated costs like employer-paid payroll taxes, health insurance, retirement contributions, and other indirect labour costs.
Related Calculators
- Manufacturing Cost Per Unit Calculator
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- Return on Investment (ROI) Calculator
- Net Income Calculation Tool
What is Direct Labour Cost?
Direct Labour Cost (DLC) represents the wages and benefits paid to employees who are directly and physically involved in the production of a product or the provision of a service. This cost is a critical component of manufacturing or service-delivery expenses and is considered a variable cost, meaning it changes directly with the level of production output.
Understanding DLC is fundamental for accurate cost accounting. It is used to calculate the cost of goods sold (COGS) and is essential for setting competitive pricing. When DLC is combined with direct material costs and manufacturing overhead, it yields the total product cost. By isolating direct labour, businesses can monitor efficiency and labour productivity.
The distinction between Direct Labour and Indirect Labour is important. Direct labour costs can be traced specifically to the final product (e.g., an assembly line worker’s wages), while indirect labour costs (e.g., a factory supervisor’s salary) are included in the manufacturing overhead.
How to Calculate Direct Labour Cost (Example)
- Identify Direct Labour Hours: Determine the total time spent by direct workers on the project. For example, a furniture maker spends 15 hours assembling a single cabinet.
- Determine the Hourly Wage Rate: Find the base pay rate for that worker. Suppose the rate is $20 per hour.
- Calculate Core DLC: Multiply the hours by the rate: $15 \text{ hours} \times \$20/\text{hour} = \$300$.
- Apply Overhead/Benefits: If the employer incurs an additional 35% in benefits (taxes, insurance) on top of the base wage, the multiplier is $(1 + 0.35) = 1.35$.
- Calculate Fully Loaded Labour Cost: Multiply the core DLC by the multiplier: $\$300 \times 1.35 = \$405$. The fully loaded direct labour cost for the cabinet is \$405.
Frequently Asked Questions (FAQ)
Is Direct Labour a fixed or variable cost?
Direct labour is typically treated as a variable cost because the total hours worked (and thus the total cost) will increase or decrease directly in proportion to the volume of production.
What is the difference between Direct Labour and Indirect Labour?
Direct labour is directly traceable to the creation of a product (e.g., factory worker). Indirect labour is necessary for production but cannot be traced to a specific unit (e.g., maintenance staff, supervisors). Indirect labour is part of manufacturing overhead.
What is included in the Fully Loaded Labour Cost?
The fully loaded cost includes the base hourly wage plus all associated employer expenses, such as payroll taxes (FICA, FUTA, SUTA), worker’s compensation insurance, unemployment insurance, health and retirement benefits, and paid time off.
Why is the Direct Labour Cost calculation important?
It is essential for accurate product costing, inventory valuation, budget control, and margin analysis. Miscalculating DLC can lead to under-pricing goods and services, resulting in financial losses.