Direct Labor (What is it, Importance and Measurement)

Every company incurs a series of expenses, which are necessary to cover its operations, this includes the payment of salaries to employees. In the administrative management of companies, the costs involved in labor are divided into costs by direct labor and indirect labor costs, depending on how a worker contributes to the production of goods.

When a company is a producer (industrial company), is considered as direct labor, the work of the personnel that participates directly in the production of the goods. For example, machine operators, packers, operators in assembly lines, etc.

When a company provides services (service company), it is considered as direct labor, the work of those people who treat or serve the client directly. For example, lawyers, doctors, consultants, etc.

What is direct labor?

It is known as direct labor the effort exerted by employees in the productive process, by means of which they are transformed raw Materials on finished products.

This work is seen or felt directly on the products, for example, the work of a welder, machinist, painter when producing a car.

It is also often called direct cost of effort.

It is a basic element within the production process, it defines the cost of the time invested by workers in the elaboration of Certain product includes wages, risk premiums, nightly bonuses, overtime and other payments associated with each worker.

It can be said concretely that labor is the human capital of a company, either direct or indirect.

Importance of direct labor in administrative management

Labor represents a very important unit, since its correct management and control determines and significantly influences the final cost of the product and / or service.

For proper administration and control of it, it is recommended:

• Constantly analyze jobs.
• Design clearly and strictly the procedures for the Staff selection, so that the work is carried out in a Efficient and effective.
• Schedule induction programs for staff.
• Plot programs continuous training.
• Provide attractive remuneration and benefits for workers, so that work is carried out with dedication and motivation.
• Provide adequate hygienic, health and safety conditions, in order to guarantee good quality and efficient work.
• Establish controls that guarantee the reduction of idle capacity.

Currently there is the problem of cheap labor, this does a lot of damage to the labor market, and consists of people willing to do certain work for very low salaries, which that negatively affects the group of workers in this sector, who do not find employment since there are those who perform such work for less money than legally stipulated.

How to measure the cost of direct labor?

In order to measure with some precision the direct labor cost, the company must consider all the expenses associated with the worker, apart from the simple salary.

Therefore, the company must include:

• The cost associated with social security paid by the employer.
• Taxes related to unemployment
• Medical assistance expenses.
• Insurance concerning worker's compensation
• Contributions to the pension plan.

In addition, the company must consider the allocation of an amount destined to the hiring and training of the worker.

Calculation of direct labor cost

To perform the direct labor cost calculation, the company must include every detail that represents a cost based on hiring and keeping an employee.

For this, the company will establish a standard rate and a model to analyze the cost of direct labor effectively. Said rate is usually an estimate of what the company expects said cost to be under normal conditions.

The basic components of a labor cost model include:

• Estimated cost per hour of direct work.
• Number of hours spent per employee to produce a unit of product.

Examples

There are many jobs to talk about an example of specific direct labor, however, some quite clear examples can be:

• The workers of a certain construction company, which builds buildings.
• Plant workers in factories manufacturing products
• Workers inside retail stores serving customers.

However, it must be clear that the workers who support the process, such as the human resources department, administration, accounting, among others, are part of the work or indirect labor.

Finally, it is worth mentioning the importance of companies maintaining a balance between automation, that is, the use of robots and labor within production and assembly lines, in such a way as to generate the work necessary for the development of the economy of the country.