Direct Labor Cost Formula Definition
A direct labor cost is the wages or salary paid to the laborer who produces the products or services for customers. It helps an e-commerce business determine how quickly and efficiently the workforce can produce finished products. The work assigned to that employee should be directly related to the specific task.
Significance of Direct Labor Cost
Here’s how the direct labor cost formula helps an e-commerce business:
- Measure labor productivity
- Obtain a clearer picture of product pricing
- Provides accuracy in your financial statements
Applications
The direct labor cost formula helps e-commerce companies determine appropriate pricing strategies for their products. Other applications include:
- Helping sellers easily identify the department or category that yields more profit by determining its labor cost
- Identifying the deviation between the actual cost of the products when compared to the labour cost involved
Direct Labor Cost Formula
Direct Labor Cost =
Pay Rate x Project Time
Definition of Each Element
Pay Rate= It is the amount charged by the employee. It could either be hourly or monthly.
Project Time= It is the time project it takes to complete
Understanding With the Help of an Example
A worker in a factory works on three different machines. Each machine has a different number of hours. These are vending machines, claw machines, and massage chairs. The total number of hours consumed by each machine is:-
- Vending machines: 12 hours
- Claw machines: 15 hours
- Massage chairs: 6 hours
If the worker charges S$15 per hour (including fringe benefits and payroll taxes), the calculation will look like this-
- Vending machine: 12 X 15 = S$180
- Claw machines: 15 X 15 = S$225
- Massage chairs: 6 X 15 = S$90
From these calculations, the total direct labor cost can be easily calculated. It will also help the company determine the future purchases of any new machine.
Grocery stores are one of the prominent examples where direct labor cost is frequently calculated.
What You Can Infer From the Formula
Direct labor cost helps business owners understand how much money they have to invest on each employee working in different departments to help produce a finished good. It is instrumental in determining the price and simplifies margin management.