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.
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.
The importance of labour costs
Labour costs play an important role when determining the selling price of a product. Manufacturers factor in labour, material, and overhead costs when determining the selling price of a product. Suppose any costs are excluded from the computation of the sales price. In that case, the amount of profit will be less than anticipated. The sales price must reflect all costs incurred.
To stay successful, a corporation must lower its labour costs if product demand drops or increased competition causes price cuts. A company can achieve this by reducing the number of personnel, reducing production, raising the bar for productivity, or lowering other costs associated with manufacturing.
For employers, the cost of labour is a crucial consideration because it aids them in the following areas:
Cost management: It aids employers in managing costs. Employers can quickly spot employees who aren't meeting standards and regulations. This allows them to make cost-cutting decisions and eliminate undeserving and underperforming employees.
Outsourcing: Management must be aware of all labour costs before contracting out any work to a seller or a supplier to estimate the updated cost structure of the company.
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