Reviewed by Jan 05, 2021| Updated on
The cost of labour is the amount of all salaries paid to the workers, as well as the employee benefits and payroll taxes charged by an employer. The labour costs are broken down into direct and indirect (overhead) costs.
Direct costs include salaries for the employees who manufacture a product, including assembly line workers, while indirect costs are related to support labour, such as employees who maintain manufacturing equipment.
Once a company sets a product's selling price, the firm takes labour, inventory, and overhead costs into account. The sale price must include the total costs incurred if any expenses are left out of the measurement of the sales price. The amount of profit is smaller than anticipated.
If demand for a product decreases, or if the enterprise cut prices, the enterprise must reduce labour costs to remain profitable.
In doing so, a company might reduce the number of workers, cut inventory, allow higher productivity levels, or reduce certain factors in the cost of production.
If a glass manufacturing company is planning the sales price for glass doors, the direct labour costs are those expenses that can be directly attributed to production. The company pays workers to run machinery that cuts glass into specific pieces for door assembly, and those expenses are direct costs.
On the other hand, the company has several employees who provide security for the factory and warehouse. Those labour costs are indirect because the cost cannot be attributed to a specific act of production.
The labour costs are also classified as fixed or variable costs. The cost of labour to run the machinery, for example, is a variable cost which varies with the production level of the firm. By increasing or decreasing output, a firm can easily increase or reduce the variable labour cost.
Fixed expenses may include fixed labour costs for long-term service contracts. A company may have a contract to perform repair and maintenance on the equipment with an outside provider, so this is a fixed expense.