What is Direct Labor?

Direct labor is production or services labor that is assigned to a specific product, cost center, or work order. When a business manufactures products, direct labor is considered to be the labor of the production crew that produces goods, such as machine operators, assembly line operators, painters, and so forth. When a business provides services, direct labor is considered to be the labor of those people who provide services directly to customers, such as consultants and lawyers. Generally, a person who is charging billable time to a customer is working direct labor hours.

What is Included in the Cost of Direct Labor?

The cost of direct labor is generally considered to include the following items:

Regular hours worked. This is 40 hours per week in most areas, though it can be less for part-time workers.
Overtime hours worked. This is the hours worked over 40 hours per week, though the exact definition may vary by jurisdiction.
Shift differentials. This is the premium paid to employees to work later shifts (the swing shift or graveyard shift).
Payroll taxes. This is the taxes paid by the employer that are derived from the wages paid to employees.

An expanded version of direct labor, known as fully-burdened direct labor, also includes an allocation of the benefit costs earned by direct labor employees. In some cases, the cost of these benefits can exceed the cost of the underlying direct labor.

Is Direct Labor a Direct Cost?

Direct labor is considered to be a direct cost, which means that it varies directly with revenue or some other measure of activity. This is not necessarily the case in a production environment, where the manufacturing area typically requires a certain amount of staffing, irrespective of the number of units produced. The direct cost concept is more applicable in a professional billings environment, where the cost of direct labor usually varies with changes in revenue.