How to Calculate Direct Labor Accounting
Plant accountants factor labor cost to determine the effectiveness of their labor input. In order to determine the cost of a unit of production, it is necessary to add direct materials, direct labor and overhead costs together and divide this by the number of units created. Direct labor is one piece of information required to determine the per unit cost of an item. There are several steps in determining direct labor costs.
Determine the labor rates for all of the direct labor employees involved in the production of your units. Labor rates can be obtained from the payroll or human resources department. Created a spreadsheet of the labor rates associated with your workers for easy access and use. You will create a spreadsheet for the material and overhead cost as well. Use a format that is easy to sort and manipulate.
Add all of the hourly rates together and divide by the number of rates present to attain an average hourly rate. Next multiply every employee's wage rate by the hours worked. Add the total wages earned in one column and add the total hours worked in a second column. Divide the total wages earned by the total hours worked. Once this step is complete you have a direct labor rate per hour for the entire worker population. This takes into account full- and part-time staff.
Pull the production reports for the following weeks' production. Use all of the full production runs to establish a baseline for the number of units produced per number of machine hours operated. Use this to determine the number of total units produced per hour. Next divide the quantity by the hours to determine normal production per hour.
Finally divide the average hourly direct labor rate by the units produced per hour. This equals the direct labor cost per unit. Use this figure to determine the effectiveness and cost benefit for the production process. This represents one piece of the costing process.
- Be sure to revise your labor rates quarterly or semi-quarterly, as these rates will change. Be certain to also revise your data as equipment is updated, increasing efficiency, and as new products are introduced.
- Be careful not to miss any of these steps. Before publishing your labor efficiency data make certain that any proprietary or confidential information is coded or masked.
Michael Owens is a corporate recruiter and business owner in Houston, TX. He joined Demand Studios in 2009, writing for eHow Money and eHow Business & Personal Finance. Michael has a master's certificate in accounting from Keller Graduate School of Management.