How to Calculate Direct Manufacturing Labor Costs

  • 16 November 2016
  • CTND
Categories: Manufacturing


When you own a manufacturing business, your days are filled juggling inventory, shipping, operational costs, tracking, and more. Amid all the tasks you’ve got on your mind, there’s one area of your business that will remain very important: your employees.

No matter how automated the manufacturing process may become, there’s always a need for a human being behind the work. It’s essential to calculate the cost of these employees into the budget of your entire business. Thanks to ERP software, determining labor costs is now easier than ever for those in the manufacturing space.

Let’s examine what constitutes direct labor costs, as opposed to indirect, as well as how to simplify the calculation for your business.

What are Direct Manufacturing Labor Costs?

Determining the difference between direct and indirect labor costs can have a huge impact on budgeting and finances – and it’s easy to get confused between the two types.

Direct labor costs can be directly tied to the production of specific, completed goods; including the salary you pay the workers who handle direct labor, working on and developing actual units of your production goods.

Indirect manufacturing labor costs are also sometimes referred to as “overhead” costs. These include labor costs that aren’t clearly associated with specific units of your production goods — for instance, the salary you pay workers who do general repairs, and don’t produce specific units. They’re still important, but their salary shouldn’t be rolled into the same financial category as direct labor.

Knowing the difference between direct and indirect labor costs is vital, in order to accurately determine financial reports, investments, and more.

Calculating Your Direct Manufacturing Labor Costs

Now that you know the difference between the two types of labor you’ve got working in your manufacturing business, determining the cost of direct labor should be a snap — for the most part.

Once you’ve determined which of your employees are considered direct labor workers, it only takes a simple calculation. Add up all the hours that all your direct labor employees work, to get one overall total. Take this overall total and multiply it by the wage rate — the result is your company’s direct labor manufacturing costs.

Unfortunately, categorizing your workers may not always be clear-cut. Maybe you have employees who perform both direct and indirect labor, or ones who temporarily take over indirect labor tasks when another employee is away on vacation. This is where it can get frustrating to calculate the exact direct labor cost your business uses – fortunately, there’s an ERP custom software solution to help, so you don’t have to do it all manually.

One of the top functionalities of ERP for business is the ability to track timesheets and expense entries through a handy form. Of course, it’s not a one-size-fits-all solution – different businesses have different employee tracking needs, and the manufacturing industry is no exception. The nice thing about using ERP to handle labor hour calculations is that it can be tailored by industry, to best suit the type of labor you’re tracking – including the ability to split direct and indirect.

For example, you may utilize a time and expense entry form that allows each ERP user to enter the number of workers on a job operation, and then choose from different presets of session lengths. In this case, the ERP software can automatically calculate the total of labor hours based on those two items. A full ERP solution gives you a fast and unique method of calculating labor hours — and ensures you get an accurate total of direct manufacturing labor costs, for your next financial report or budget meeting.

Use ERP for Accuracy

It’s easy to get confused over what constitutes direct and indirect labor. Unfortunately, having unclear numbers and calculations can impact how you determine employee budgeting, as well as your bottom line.

The best way to get an accurate reading on your direct labor costs – without including indirect labor or overhead – is to use an advanced ERP solution for quick, automatic calculations. Once you implement ERP, you’ll find that not only does it automate many of your work processes, but it’s also perfect for labor time and cost tracking; and who doesn’t want one less worry off their plate?

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