What is Direct Labor Cost? How to Calculate It?

Direct labor cost is what you pay for the people who work directly on a product or a client job: their wages plus the payroll taxes and benefits that go with those wages. To calculate it for a job, multiply each person's hours on that job by their hourly cost, including taxes and benefits, then add the results. OpenStax defines it as "the total cost of wages, payroll taxes, payroll benefits, and similar expenses for the individuals who work directly on manufacturing a particular product." Labor that supports the work without being traceable to one job is indirect labor, and it's counted in overhead instead.

Billed publishes this page. Definitions are quoted from the open textbook OpenStax Principles of Accounting, Volume 2: Managerial Accounting (published February 14, 2019; pages revised April 23, 2026), opened on October 30, 2026.

What counts as direct labor

OpenStax's glossary defines direct labor as "labor directly related to the manufacturing of the product or the production of a service". So it applies to service businesses too: a designer's hours on a client project are direct labor for that project.

What goes into the cost, in OpenStax's words, is "the total cost of wages, payroll taxes, payroll benefits, and similar expenses". Payroll tax amounts depend on your payroll and location. Take them from your payroll records, and ask your accountant which costs to include.

Direct or indirect labor

OpenStax defines indirect labor as "labor not directly involved in the active conversion of materials into finished products or the provision of services". It explains how to decide:

• "Deciding whether the expense is direct or indirect depends on its task."
• "If the employee’s work can be directly tied to the product, it is direct labor."
• "If it is tied to the factory but not to the product, it is indirect labor."
• "If it is tied to the marketing department, it is a sales and administrative expense, and not included in the cost of the product."

The same person can fall on either side. OpenStax notes: "What may be a direct labor cost for one company may be an indirect labor cost for another company or even for another department within the same company."

Indirect labor is assigned to jobs through overhead. How to spread overhead across jobs is covered in what is cost accounting. For what counts as indirect labor and how to total it, see indirect labor cost.

Tracking hours by job

To trace labor to a job, you need each person's hours on it. OpenStax says employees "may fill out time tickets that include job numbers and time per job, or workers may scan bar codes of specific jobs when they begin a job task."

Direct labor in prime cost

Direct labor is one of two parts of prime cost, which OpenStax defines as "direct material expenses and direct labor costs". It's also part of conversion costs, the "total of labor and overhead for a product".

Sample: direct labor for one sign job

The figures here are a sample, invented for this example. A sign shop makes two matching signs for one client as job 217. Each hourly cost below already includes that person's wages, payroll taxes and benefits.

1. Designer: 3.5 hours × $32.00 an hour = $112.00.
2. Installers: 2 people × 4 hours each × $28.00 an hour = $224.00.
3. Direct labor for job 217: $112.00 + $224.00 = $336.00.
4. Not included: the shop supervisor's time, which can't be tied to this job, so it's indirect labor and goes into overhead.
5. Prime cost: direct materials of $410.00 + direct labor of $336.00 = $746.00.
6. Per sign: $336.00 ÷ 2 = $168.00 of direct labor, and $746.00 ÷ 2 = $373.00 of prime cost.

For how labor feeds the cost of producing one more unit, see what is marginal cost.

Where Billed fits

The hours come from time records. Billed's time tracking page says: "Log time for each task as you work, and see how much time goes into each project." It also says: "Create timesheets from the time you and your team have tracked to see how the team is spending its time, and export them when a client or your accountant needs a copy." The hourly rate you bill a client is a price, not the labor cost; the cost uses each person's wages, payroll taxes and benefits.

Related Articles

• What Is Cost Accounting? A Simple Guide for Small Business
• What is Marginal Cost? A Simple Guide for Small Business
• What Is a Journal Entry in Accounting? Debits, Credits and an Example

Frequently Asked Questions

What is direct labor cost?

OpenStax defines direct labor as "the total cost of wages, payroll taxes, payroll benefits, and similar expenses for the individuals who work directly on manufacturing a particular product."

How do you calculate direct labor cost for a job?

Multiply each person's hours on the job by their hourly cost, including wages, payroll taxes and benefits, then add the results. In this page's sample, 3.5 hours at $32.00 plus 8 hours at $28.00 comes to $336.00.

What is the difference between direct and indirect labor?

OpenStax says: "If the employee’s work can be directly tied to the product, it is direct labor. If it is tied to the factory but not to the product, it is indirect labor."

Does a service business have direct labor?

Yes. OpenStax defines direct labor as "labor directly related to the manufacturing of the product or the production of a service".

What is prime cost?

OpenStax defines prime costs as "direct material expenses and direct labor costs".