How Is Direct Labor Cost Calculated?

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The simplest method for calculating direct labor cost is represented by multiplying the total hours worked times the wage rate for the period of time in question. The equation looks like this: direct labor cost equals total labor hours times labor rate.

Labor costs are segregated in two categories: direct labor costs and indirect labor costs. Direct labor costs are the total costs incurred by workers directly working to produce goods or provide services for customers. Indirect labor costs include the labor rates paid to support and run the business such as management, administration or building maintenance. Indirect labor costs have no direct relation to the production of goods or services.

For many businesses, direct labor costs are more than wages paid to employees. For these businesses, direct labor costs should include employee benefits and payroll taxes in addition to wages. This might include health and life insurance, workers’ compensation insurance, company matched retirement contributions, and payroll taxes for all direct laborers.