Direct and indirect (overhead) costs make up labor costs. Direct costs are wages for employees who produce a product, like assembly line workers. Indirect costs involve support labor, such as maintenance staff. These known as the burden rate, cover all auxiliary, indirect, and incidental hiring and retaining costs. Improper allocation can shift product prices away from true cost, affecting profits. Companies consider these costs when setting product prices. To stay profitable, costs must be cut if demand falls or prices are reduced. Labor costs shift directly to consumers. Direct labor costs are directly traced to production. Labor costs vary as fixed or variable. Difficulties in allocating indirect labor costs may result in incorrect product pricing.
Different Types of Labor Rates
What are the different types of Labour rates?
Labor costs include fixed, variable, indirect, and direct. These major expenses require proper management for business expansion. Incorrect evaluation and allocation can raise production costs and decrease profits. Labor costs are divided into indirect and direct. Benefits, hourly wages, and payroll taxes for production workers make up direct costs. Indirect costs include non-production staff like marketing and human resources. Variable costs depend on output, while fixed costs don’t. Business owners can avoid overtime expenses for some employees by planning schedules and training employees in multiple areas. Monitoring overtime and enforcing clock-in rules can minimize labor costs.
Labor Cost Allocation Methods
What are labor cost methods?
Standard cost and actual cost are two labor cost allocation methods, each with pros and cons. Standard costing assigns estimated costs, which is simple but can be inaccurate over time. Actual costing uses timesheets and payroll services, aiming for more precise cost allocation by avoiding the focus solely on salary. Actual costs reveal direct per-person expenses, aiding accurate job costing and increasing profits. Timesheets integrated with payroll services simplify process automation.
Labor Expense Category
What type of expense is labor?
Contract labor is an operating expense because it’s incurred during business operation and is not a capital expenditure. It can also fall under personnel expenses, as it often substitutes for employee roles, or other expenses for varied uses. The correct expense category depends on the business context.