Direct Cost vs Indirect Cost
Direct Labor Variance Formulas
Direct Material Variance Formulas
Absorption Cost Accounting
What is Direct Labor?
In accounting, direct labor costs are the costs associated with paying
workers to make a product or provide a service. The workers must be clearly involved in producing the product or providing the service. Direct labor costs are one of the costs associated with producing a product or providing a service. Direct labor costs are in contrast to indirect labor costs, which are costs associated with workers who are necessary but not directly involved with making the product or providing the service.
Examples of direct labor costs include, in a manufacturing setting, wages paid to workers in an assembly line or, in a service setting, wages paid to workers in the kitchen of a restaurant. Direct Labor and Overhead Allocation
Sometimes it may be appropriate to use direct labor as a cost driver to allocate indirect costs to a production process.
Because indirect costs, such as overhead costs, are not directly traceable to the final product, but they are necessary for the production of the process and thus must be incorporated in the overall cost of the product, must be allocated to the final product by way of a cost driver.
In production processes in which direct labor is an appropriate cost driver, indirect costs can be allocated to the cost of units of output via direct labor hours. The indirect costs would then be allocated to the units of output using a cost driver rate, such as $2 dollars per hour of direct labor, or $0.40 per hour of direct labor, depending on the specifics of the production process.
Direct labor was historically a typical cost driver for allocating indirect costs to units of output from a production process, but as production processes have become more automated over time, using direct labor is no longer as common as it once was. And now other cost drivers are frequently used to allocate indirect costs in a production process or in providing services to customers. Source:
Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.