Concept And Meaning Of Labor and Labor cost

Concept And Meaning Of Labor

Labor is the physical or mental effort expended in manufacturing a product. Labor cost is the price paid for using human resources. The compensation paid to employees who engage in production-related activities represent factory labor cost.

Like materials, labor is also one of the prime inputs of production system. All manufacturing concerns require the labor for carrying out their production activities. The labor consists of workers who are essential to convert materials into finished products. The workers operate machine and perform other tasks to help convert materials into final outputs.

The labor can be either direct or indirect. The labor who is directly engaged in the conversion process is called direct labor and who is not is called indirect labor. The labor, however, should be properly utilized and satisfactorily paid in order to minimize labor turnover and labor cost. Unlike materials, labor is complex to deal with. Dissatisfied and discontented labor always results in high labor costs and low quality outputs. Therefore there should be proper planning, accounting and controlling of labor.

Concept And Meaning Of Labor cost

The payment made to the labor in exchange for its service is called labor cost, which constitutes a major part of the total cost of production. Labor cost is also commonly called wages. Labor cost or wages is one of the major elements of cost. Labor cost represents the expense incurred on both direct and indirect labor. However, labor cost is more than just wage as it includes the total amount of financial benefits given by the concern to all its workers and employees for their time and effort used in producing goods and services. It is, in fact, the financial compensation provided to the workers for their physical and mental contribution for converting raw materials into finished outputs. Labor cost includes monetary and non-monetary (fringe) benefits. Monetary benefits include basic wages, dearness allowance, employer's contribution to provident find, production bonus, pension and gratuity. Fringe benefits include subsidized food, subsidized housing, subsidized education, medical facilities and holiday pay.

For costing purposes, labor can be classified into two broad categories, i.e., direct labor and indirect labor. The distinction between direct and indirect labor is important because it helps:

To determine accurate product cost,

To measure efficiency of performance,

To minimize error in overhead allocation, and

To ensure better cost analysis for decision-making and control.