Labor Cost Calculation: Classification, Time Measurement, and Allocation

Labor Cost Definition and Components

The cost of labor is defined as the monetary value of human labor applied to production and consumption. The concept of labor cost includes:

• Personal remuneration (whether direct or indirect).
• Compulsory charges imposed by law, such as Social Security contributions, company costs, and workplace safety expenses.

Classification of Labor Costs

Direct Labor Costs

Direct labor costs are personnel costs that can be identified directly with the finished product or the service provided. This cost can be measured and assessed individually in relation to specific products or departments.

Indirect Labor Costs

Indirect labor costs consist of personnel costs for workers engaged in secondary or ancillary production tasks (e.g., transport, cleaning, repair). Their involvement impacts the implementation of various goods or services but cannot be traced individually to a specific product.

Indirect labor can only be measured and valued globally. The indirect labor supply and transformation costs are included in indirect manufacturing costs.

Components of Direct and Indirect Labor Cost

Labor cost accounts are typically classified based on proportionality:

• Direct Components: Usually proportional to the activity or output.
• Indirect Components: Usually proportional to the number of people employed.

Time Measurement for Personnel Cost Calculation

To accurately calculate the personnel costs associated with a product, it is necessary to know the time each employee spends on a particular task. We distinguish between several types of time:

Paid Time

The total hours for which the employee is compensated.

Time of Presence

The hours theoretically available for production.

Uptime (Production Time)

The hours actually available for work. Uptime is equivalent to the Time of Presence minus Idle Time.

Causes of Idle Time

Idle time is the difference between Time of Presence and Uptime. It may be due to two main categories:

1. Normal Circumstances of the Production Process: Time spent on necessary secondary tasks, such as repairing, cleaning, or routine maintenance.
2. Faults in the Production Process: Unplanned interruptions, such as internal failures, legal breaks, or strikes.

Controlling and Recording Labor Time

Time control is usually managed by the time control department or the personnel department. The primary task is maintaining an accurate record of time usage for each worker, differentiating between two key controls:

• Control of Time of Presence: Using methods such as time clocks or digital systems to record when an employee is available.
• Control of Working Time: Necessary to track the specific time each worker spent performing a particular task or job order.

Allocation of Idle Time Costs

The cost of idle time must be allocated either as a Product Cost or a Period Cost. The method of allocation depends entirely on the cause of the downtime:

• Product Cost Allocation: If the downtime is caused by normal circumstances inherent to the production process, the idle time cost should be considered part of the product cost.
• Period Cost Allocation: If the loss of time is completely unpredictable or due to reasons unrelated to the production process (e.g., strikes, major unforeseen failures), the idle time cost should be considered a period cost (expensed immediately).