Definition: Direct labor is the amount of effort exerted by employees to convert raw materials into finished goods. In other words, it’s the employees’ work that goes into making the products a manufacturer sells. This work can be traced back directly to the products they help produce. For example, a welder, machinist, or painter all help produce a specific product. Direct labor is usually referred to as a cost instead of an amount of effort.
What Does Direct Labor Mean?
This is in contrast with indirect labor costs that cannot be traced back to a single product. For instance, workers who help the machinists by cleaning out their machines can’t be traced back to a single product because they don’t actually produce anything.
Since labor is one of the biggest expenses on a manufacturer’s income statement, cost accountants naturally want to track and control these costs by separating them from indirect costs. Management tracks direct labor costs and assigns them to the products they help produce. For instance, an assembly line worker in a Ford Motor plant who bends fender parts not only helps produce the overall vehicle. He or she also produces the fender itself.
Example
Once labor costs have been allocated to products like a fender, managerial accountants can start analyzing overall costs and start planning ways to produce parts more efficiently and cost effectively. Most modern factories and assembly lines have a balance of workers and robots assembling products. The Ford Motor plant uses robots for spot welding and painting but uses human labor for assembly and other more technical duties.
Largely the balance depends on the overall cost of labor compared with the cost of automation. If labor costs increase drastically because of union strike perhaps, the company is more likely to invest in automation to lower its direct labor costs over time. If direct labor expenses are at a suitable level, management probably won’t invest in new automation.
