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Cost Of Labour: Definition, Types, Formula

Definition of Cost of Labour

The total of all employee wages, employee benefits, and payroll taxes paid by an employer constitutes the labour cost. Labour costs can be categorized into two main categories, direct (production) and indirect (non-production) cost of labour. While indirect costs are related to support labour, such as personnel who maintain industrial equipment, direct costs include wages for the employees who make a product, including those on an assembly line.

Types of Cost of Labour

Variable Cost and Fixed Cost

Labour costs can be further classified as either variable or fixed costs. Variable cost is the cost that changes depending on the firm's production level. A firm can quickly increase or decrease variable labour costs by increasing or decreasing production. One example of a variable cost is the cost of labour to operate the machinery, which changes depending on the firm's production level.

Fixed cost, as the name suggests, is the cost that does not change with a change in a firm's production level. For example, fixed fees for long-term service contracts may be included in fixed labour costs. A fixed-price contract is a set-up between a business and an outside provider for resolving issues related to repair and maintenance. 

Direct & Indirect Cost of Labour

The costs that can be directly attributed to production are the direct labour costs when a glass manufacturing company plans the sales price for glass doors. The company incurs direct costs when employees operate equipment that cuts glass into precise pieces for door installation.

Conversely, the business employs several people to guard the warehouse and factory. Because the cost cannot be linked to a specific act of production, those labour costs are indirect.

Formula to Calculate

We are aware that labour costs are divided into direct and indirect costs. The following formula can be applied to calculations: Cost of Labour = Total Direct Labour Cost + Total Indirect Labour Cos