Labour cost refers to all wages, benefits and taxes an employer pays. It is divided into direct and indirect costs. Direct costs include salaries for production staff, while indirect costs cover support roles like equipment maintenance.
Types of Costs
Labour costs can be variable or fixed. Variable costs change with the level of production. For example, if a firm increases production, it may need more labour, increasing the cost. Fixed costs don't change with production levels. A long-term service contract is an example of a fixed labour cost.
Significance of Labour Costs
Labour costs are vital in determining a product's selling price. They must be factored in along with material and overhead costs to ensure profitability. If demand drops or competition increases, a company must reduce its labour costs to remain profitable.
Labour costs benefit employers by helping control costs and informing outsourcing decisions.
Direct and Indirect Costs
Direct labour costs can be traced back to production. For a glass company, these costs include employee wages for cutting glass for doors. Indirect costs, like security personnel salaries, can't be traced to specific production activities.
Labour costs can be calculated using the formula: Labour Cost = Total Direct Labour Cost + Total Indirect Labour Cost.