Definition
The direct labour hour rate (labour hour rate) can be understood in two primary contexts in accounting and cost management:
- Individuals’ Rate of Pay: The individual rate of pay per hour paid to operators categorized as direct labour.
- Absorption Rate in Costing: An absorption rate used in absorption costing, obtained by the following formula:
\[ \text{Direct Labour Hour Rate} = \frac{\text{Total Labour Cost}}{\text{Total Direct Labour Hours Worked}} \]
Examples
- Manufacturing Plant Employee: In a manufacturing plant, a worker engaged directly in the production of goods may have an hourly wage of $20. This wage represents the direct labour hour rate for that workforce.
- Costing System: In the absorption costing system, if a company has total direct labour costs of $50,000 and it recorded total direct labour hours of 2,500, the direct labour hour rate would be:
\[ \text{Direct Labour Hour Rate} = \frac{50,000}{2,500} = 20 \text{ dollars per hour} \]
Frequently Asked Questions (FAQs)
What is included in direct labour costs?
Direct labour costs include wages and salaries directly attributable to the production process or services provision. This does not typically include indirect labour like supervisory staff or administrative personnel.
How does the direct labour hour rate impact pricing?
The direct labour hour rate impacts the costing and pricing of products. Higher direct labour hour rates may lead to higher product prices to maintain profit margins unless efficiencies or cost cuts are realized elsewhere in production.
How do companies calculate direct labour hours?
Direct labour hours are typically recorded through timesheets, biometric attendance systems, or job scheduling software, ensuring accurate tracking of hours worked by each direct labour employee.
Why is it critical to differentiate between direct and indirect labour?
Differentiating between direct and indirect labour affects product costing, financial reporting, and resource allocation. Direct labour is charged to specific job costs, while indirect labour is treated as overhead.
Can direct labour hour rates change, and what factors affect them?
Yes, direct labour hour rates can change over time due to factors like inflation, wage agreements, market demand for skilled labor, and changes in statutory minimum wages.
Direct Labour
Labour costs that can be specifically attributed to the production of goods or services.
Absorption Costing
A costing method that includes all manufacturing costs—direct materials, direct labour, and both variable and fixed manufacturing overheads—in the cost of a product.
Absorption Rate
A rate used in absorption costing to allocate fixed overhead costs to individual products or services.
Online Resources
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan.
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer.
- “Accounting: What the Numbers Mean” by David H. Marshall, Wayne W. McManus, and Daniel F. Viele.
Accounting Basics: “Direct Labour Hour Rate” Fundamentals Quiz
### How do you calculate the direct labour hour rate?
- [ ] By multiplying the total labour cost by total hours worked.
- [x] By dividing the total labour cost by the total direct labour hours worked.
- [ ] By dividing the total material cost by total hours worked.
- [ ] By subtracting the total overhead cost from the total labour cost.
> **Explanation:** The direct labour hour rate is calculated by dividing the total labour cost by the total direct labour hours worked.
### What is an example of direct labour?
- [x] Wages paid to a production line worker.
- [ ] Salaries of administrative staff.
- [ ] Payments to janitorial services.
- [ ] Fees to external auditors.
> **Explanation:** Direct labour typically includes wages paid to workers directly involved in the production process, such as a production line worker.
### Which costing method utilizes the direct labour hour rate?
- [ ] Standard costing
- [ ] Direct costing
- [x] Absorption costing
- [ ] Marginal costing
> **Explanation:** The direct labour hour rate is used in absorption costing, which allocates all manufacturing costs to products, including both variable and fixed costs.
### What term refers to wages and salaries directly attributable to the production process?
- [ ] Indirect labour
- [x] Direct labour
- [ ] Overhead
- [ ] Administrative expenses
> **Explanation:** Direct labour refers to wages and salaries directly attributable to the production process or services provision.
### Which type of labour is not included in direct labour costs?
- [ ] Assembly line workers
- [ ] Machine operators
- [x] Administrative staff
- [ ] Production supervisors
> **Explanation:** Administrative staff are considered indirect labour and their costs are not included in direct labour costs.
### If a company has total direct labour costs of $80,000 and recorded 4,000 hours, what is the direct labour hour rate?
- [ ] $10/hour
- [ ] $15/hour
- [x] $20/hour
- [ ] $25/hour
> **Explanation:** The direct labour hour rate is calculated as $80,000 / 4,000 hours = $20/hour.
### Why is accurate tracking of direct labour hours important?
- [ ] It helps in measuring employee satisfaction.
- [ ] It ensures compliance with tax laws.
- [x] It allows for precise product costing and pricing.
- [ ] It avoids any labour disputes.
> **Explanation:** Accurate tracking of direct labour hours is crucial for precise product costing and pricing, ensuring the business continues to be profitable.
### Which factor is least likely to affect the direct labour hour rate?
- [x] The color of the uniforms.
- [ ] Inflation.
- [ ] Wage agreements.
- [ ] Statutory minimum wages.
> **Explanation:** The color of the uniforms is least likely to affect the direct labour hour rate, whereas economic factors directly impacting wages do.
### How are indirect labour costs treated in costing?
- [ ] They are ignored in cost accounting.
- [x] They are treated as overhead.
- [ ] They are deducted from direct labour costs.
- [ ] They are split equally among all products.
> **Explanation:** Indirect labour costs are treated as overhead and are allocated to products or services based on predetermined overhead rates.
### Which system requires differentiation between direct and indirect labour?
- [x] Cost accounting
- [ ] General ledger accounting
- [ ] Payroll accounting
- [ ] Financial reporting
> **Explanation:** Cost accounting requires differentiation between direct and indirect labour for accurate cost allocation and product costing.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
$$$$
