Direct Labor
Wages paid to workers who are directly involved in converting raw materials into finished products and whose effort can be traced to specific units.
What is Direct Labor?
Direct labor refers to the compensation paid to employees whose work is directly and physically involved in the manufacturing of a product. Unlike indirect labor (such as supervisors or maintenance workers), direct labor can be specifically traced to individual units of production. It is one of the three primary components of product cost, alongside direct materials and manufacturing overhead. In standard costing systems, companies establish direct labor rate standards and efficiency standards to measure actual performance against targets and identify production variances.
Example
An electronics manufacturer pays assembly workers $25 per hour. If each unit requires 2 hours of assembly time, the direct labor cost per unit is $50. If the company produces 10,000 units per month, total direct labor cost is $500,000 — a figure that flows into the cost of goods manufactured schedule.