Direct manufacturing labor costs and how to calculate them
Manufacturing labor costs represents the total cost of workers needed to manufacture final goods. This is a great business solution because it helps to understand how much of the cost is going to be needed to pay the laborers that produced the final products. This cost is calculated by computing the direct employees and their salaries. It is very important to be able to identify direct labor costs from indirect labors costs.
1.- Identify Direct Workers: These are the employees who actually make the work on the manufacturing process, for example in an apparel company, the operator that sew the garments is a direct worker but the person that does the cleaning is not.
2.- Adding Operation: Need to add up the total hours from a specific period of all the direct workers. For example 5 employees that worked 300 hours each, would total 1,500 hours.
3.- Multiply Operation: In order to get the total direct manufacturing costs, we need to multiply the total hours by the rate of the labor. For example, let’s say that the rate is $9 pesos per hour, then 1,500 hours X 9 = 13,500 which means that the direct costs are $13,500 pesos.
Salomon Juan Marcos Villarreal, president of Grupo Denim a famous maquiladora located in Gomez Palacio, Durango, México, explained that all accounting center costs are much needed to run a successful business and that even a small companies need to have their own accounting solutions. “Direct and indirect labor costs are significantly important because they help to measure the business by defining the cost; in our case, of the garments sold. When we analyze both costs when talking about profits, the accurate information from both costs defines how the production rates and profits are moving and then we can control them”, said Salomon Juan Marcos Villarreal.