What is direct labor?

Definition

Direct labor is the wage earned by people whose hands are on the product or the delivered job. On the books, those hours sit in work in process inventory while goods are still being made, then they move with the job.

A screen print shop can point a press operator's hours at a shirt run. The person answering the phone that same afternoon is usually not this cost.

Cash-basis books may wait until payday. Accrual books record the hours when they are earned, even if the check is next week.

This cost is the traceable wage. It is not shop rent, and it is not the ink still on the shelf.

Where it shows up

Balance Sheet: Related to work in process until the goods are sold.

P&L: Located in cost of goods sold or cost of services once the job is delivered.

Cash flow: Decreases in accrued payroll, reported cash from operating activities decreases.

See also: Cost Of Goods Sold · Job Costing · Labor Burden

When you look at your Balance Sheet, unfinished shirt runs hold this wage inside work in process. Completed boxes waiting to ship hold it in finished goods inventory.

When the unfinished balance is high, cash is often sitting in shirts that are still on the press. When it is low, the floor may be current, or the shop may be sending jobs out the same day.

The Income Statement does not keep this wage as a standing line while the shirts are unsold. The related expense shows up as cost of goods sold once the order is delivered, or as cost of services for a service shop.

On the Statement of Cash Flows, payday is the cash event. Cash from operating activities falls when those wages leave the bank.

Unpaid hours sit in accrued payroll until payday. A payroll accrual at month-end catches hours that crossed the close.

How it works

The operator clocks in on a job. Those hours belong to that shirt run, not to the office.

If payday has not arrived, the bookkeeper debits work in process and credits accrued payroll. The hours are already a cost, even though cash has not moved.

When the shirts finish, the job's wage cost moves with the rest of the unit cost into finished goods. Until a customer takes the order, the wage is still an asset.

When the order is delivered, that wage leaves inventory with the rest of the unit. It then sits under cost of goods sold for the period.

Stay with the people who made the product. A designer who never stands at the press is usually overhead, even if the art was needed.

The record of hours is the document behind this cost. Anyone tying a job to payroll should be able to see which hours hit which run.

Do not treat payday as the job cost if the hours were already accrued. Payday clears the liability; this cost was recorded when the hours were earned.

After the shirts sell, the wage dollars are gone from the Balance Sheet. They do not sit in a permanent labor-expense account of their own if this is a product shop.

Current liabilities hold the unpaid wages until the check is cut. Paying them later is a Balance Sheet and cash event, not a second pass through the job.

Keep the job tickets with the hours. Extra overtime on a rush order still belongs to that run if the operator was on that press.

Example

A screen print shop finishes a 200-shirt run. The press operator earned $640 on that job, and payday is Friday.

The hours are recorded:

Debit: Work in process inventory $640

Credit: Accrued payroll $640

Work in process rises by $640, and accrued payroll (a liability) rises by the same amount. Cash has not moved, and the Income Statement has not changed yet.

The $640 is still inventory, now sitting on an open job. It becomes cost of goods sold only when the finished shirts are delivered.

If the shirts ship the same week, the shop later moves that $640 out of inventory and onto the P&L. Friday's payroll then clears the $640 liability.

Common mix-ups

Direct labor is not labor burden. The wage is the base pay; burden is the payroll taxes, benefits, and insurance layered on top.

Direct labor is not every wage the shop pays. Front-desk, sales, and bookkeeping hours sit lower as operating expenses after the goods are delivered.

Direct labor is not cost of goods sold on its own. The wage is still an asset until the finished shirts leave.

Related terms

• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Cost Of Services: The direct cost of delivering services, used in place of cost of goods sold.
• Labor Burden: The payroll taxes, benefits, and insurance layered on top of base wages.
• Job Costing: Tracking revenue and cost for each individual job, project, or order.
• Fully Burdened Labor Rate: The all-in hourly cost of an employee including burden.
• Timesheet: The record of hours worked, used to drive payroll and job costing.
• Work In Process Inventory: Partially completed goods still moving through production.
• Gross Margin: Gross profit expressed as a percentage of revenue.