For costing purposes, labour can be classified into two broad categories, i.e., direct labour and indirect labour. The distinction between direct and indirect labour is important because it helps:
(i) To determine accurate product cost,
(ii) To measure efficiency of performance,
(iii) To minimise error in overhead allocation, and
(iv) To ensure better cost analysis for decision-making and control.
Direct labour can be described as the labour which is engaged directly in ill manufacture of a product or in a particular job or service and which can be convenient allocated to the job, process or production unit. It is the labour engaged in changing composition, form or condition of a product manufactured.
It represents the labour when directly operates the manufacturing machinery and equipments. It handles the raw materials, work-in-process and finished goods on the production line. It can also called productive labour, process labour, operating labour and prime cost labour.
The important features of direct labour are as follows:
1. It is conveniently identified and allocated to cost unit.
2. It varies directly with the volume of output.
3. It is engaged in the manufacture of goods or providing services.
4. It is engaged in altering the composition, form or condition of a product,
5. It is easily ascertained and controlled.
Some examples of direct labour are:
(i) Labour engaged in converting raw materials into finished product.
(ii) Labour engaged on a construction job.
(iii) Compositors engaged in a printing press.
(iv) Drivers and conductors engaged ^n a bus transport undertaking.
(v) Helper attending a machine operation.
Wages paid to direct labour are termed as direct labour cost, direct wages to manufacturing wages and form part of prime cost.
Indirect labour is that labour which cannot be easily and conveniently allocated to the job, process or production unit. It represents labour which is not directly engaged in the manufacture of a product or in a job or service but indirectly helps in production. In short, the labour which cannot be directly identified with a job, process or operation, is generally treated as indirect labour. Examples of indirect labour are as follows:
(i) Labour employed as supervisors, repair workmen, inspectors.
(ii) Maintenance workers such as workshop cleaner, mechanics, etc.
(iii) Labour engaged in purchasing, stores, factory office, time-keeping, canteen, etc.
Wages and salaries paid to such staff are treated as indirect labour cost which is included in overheads.
The distinction between direct and indirect labour in cost accounting is based not only on the nature of job done or the manufacturing system but also upon the circumstances in which labour costs are incurred. It also depends upon the organisation structure. Salary of a supervisor is direct if he supervises a particular job and it is indirect if he is engaged in supervision of different jobs.
The importance of distinction between direct and indirect labour costs is to provide a more accurate product cost and to exercise a strict control over labour cost. The direct labour cost is charged to jobs and forms part of the prime cost, whereas indirect labour cost becomes a part of overheads.