Direct and Indirect Labour Cost [Cost Accounting Notes BCOM]


Direct and Indirect Labour Cost

Labour is classified into 

(a) direct labour and 

(b) indirect labour.

(a) 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.

(b) Indirect labour cost is the amount of wages paid to workmen who are not directly involved in altering the composition of the product. Direct labour cost forms part of prime cost, whereas indirect labour cost forms part of overheads.

Labour costs represent the various items of expenditure incurred on workers by the employer and would include the following:

(a) Monetary Benefits e.g.: 

(i) Basic Wages; 

(ii) Dearness Allowance; 

(iii) Employer’s Contribution to Provident Fund: 

(iv) Employer’s Contribution to Employees’ State Insurance (ESI) Scheme; 

(v) Production Bonus; 

(vi) Profit Bonus; 

(vii) Old age Pension; 

(viii) Retirement Gratuity.

(b) Fringe Benefits, e.g.: 

(i) subsidized Food; 

(ii) Subsidized Housing; 

(iii) Subsidized Education to the children of the workers; 

(iv) Medical facilities; 

(v) Holidays Pay; 

(vi) Recreational facilities.

Difference between Direct labour costs and indirect labour costs are given below:

1. Definition: 

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.

Indirect labour cost is the amount of wages paid to workmen who are not directly involved in altering the composition of the product.

2. Tracing: 

Direct labour cost forms part of prime cost, whereas indirect labour cost forms part of overheads.

3. Nature - Variable vs. fixed: 

Direct costs are typically variable costs which varies directly according to production or level of activity.

Indirect costs are fixed costs, meaning they do not vary with the volume of production or level of activity.

4. Examples: 

Examples of direct labour costs include direct labour, and other expenses that are directly incurred in the production of a product or delivery of a service. 

Examples of indirect costs foremen and supervisors expenses, utilities, and indirect labour, canteen and labour welfare expenses which cannot be directly attributed to a specific product or service.