Direct labor is labor that specifically goes to creating products and sometimes to delivering services. For example, direct labor is often needed to change raw materials into product parts. Variable costs are those costs in business that change, based on how many products are created, and tend to move both up and down with product volume. Direct labor often fits into this category. From the perspective of the business, there are several advantages to including direct labor as a variable cost.
Accuracy in Accounting
When direct costs are treated as variable costs, they are accounted for based on product volume instead of on more fixed factors. This generally allows for more accurate accounting. One of the primary goals of accounting is to ensure that money in the business follows value in the business, wherever possible. By attaching the expense of labor to the value created per product unit, labor becomes highly accurate from an accounting perspective.
Accuracy in Cost Estimation
Cost estimation refers to costing out projects, supplies and manufacturing expenses accurately so they can be predicted and prepared for by the business. When labor is treated as a variable cost, it becomes easier to account for a specific cost of labor based on how many products are created during a particular project. This allows for greater accuracy in cost estimation, which leads to better decisions made by the business.
Flexibility in Labor Management
When labor is counted as a variable cost, it becomes much easier to quantify it and prepare for necessary labor changes. A labor manager can look at upcoming figures and business strategies and have a very clear idea how much direct labor will be needed. Since the company is already used to thinking of labor as moving with product volume, then necessary cuts in labor or labor expansion are accepted more quickly and made more efficiently.
Businesses do not need to count labor as a purely variable cost. If variable accounting processes are an option, then companies can combine them with fixed costing systems in order to create hybrid systems. This can be a useful option if the business has workers who have direct input on products but also have lasting skills in other areas of the business, making the employees valuable additions with labor that is difficult to count as purely variable.