Operations Books. Articles Topics Index Site Archive. About Contact Environmental Commitment. It is frequently subdivided into a salaries expense account for individual departments, such as: Salaries expense - accounting department Salaries expense - engineering department Salaries expense - human resources department Salaries expense - marketing department Salaries expense - quality assurance department Salaries expense - sales department Hourly wages may also be included in this expense category, in which case the account is usually entitled "Salaries and Wages - [department name]" to show the more comprehensive nature of the account.
Presentation of Salaries Expense Any of the preceding accounts appear in the income statement , and may be aggregated into a larger cluster of expenses, such as a single line item of expenses for a department, or within the cost of goods sold line item.
Recordation of Salaries Expense The amount recorded as a salary expense may vary depending on the basis of accounting used. Sales tax definition Safety stock definition. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The cost of labor is the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer.
The cost of labor is broken into direct and indirect overhead costs. Direct costs include wages for the employees that produce a product, including workers on an assembly line, while indirect costs are associated with support labor, such as employees who maintain factory equipment. When a manufacturer sets the sales price of a product, the firm takes into account the costs of labor, material, and overhead. The sales price must include the total costs incurred; if any costs are left out of the sales price calculation, the amount of profit is lower than expected.
If demand for a product declines, or if competition forces the business to cut prices, the company must reduce the cost of labor to remain profitable. To do so, a business can reduce the number of employees, cut back on production, require higher levels of productivity, or reduce other factors in production cost.
In some cases, the cost of labor can be shifted directly toward the consumer. For example, in the hospitality sector, tipping is often encouraged, allowing businesses to reduce their cost of labor. Assume that XYZ Furniture is planning the sales price for dining room chairs. The direct labor costs are those expenses that can be directly traced to production.
XYZ, for example, pays workers to run machinery that cuts wood into specific pieces for chair assembly, and those expenses are direct costs. On the other hand, XYZ has several employees who provide security for the factory and warehouse; those labor costs are indirect, because the cost cannot be traced to a specific act of production.
Labor costs are also classified as fixed costs or variable costs. For example, the cost of labor to run the machinery is a variable cost, which varies with the firm's level of production. A firm can easily increase or decrease variable labor cost by increasing or decreasing production. Fixed labor costs can include set fees for long term service contracts. Even if the economy craters and your sales drop to zero, fixed costs don't disappear.
Any employees who work on salary count as a fixed cost. They earn the same amount regardless of how your business is doing. Employees who work per hour, and whose hours change according to business needs, are a variable expense.
Piecework labor, where pay is based on the number of items made, is variable — so are sales commissions. If you must have a minimum number of employees to keep the sales office or the production line running, their pay may be a fixed cost.
If you pay someone a mix of fixed salary plus commission, then they represent both fixed and variable costs. When you look at expanding your business, you have to look at the variable costs. For example, if you plan to grow your lunch eatery to include the dinner shift, you'll need to spend more money on staffing the restaurant at night. If you expand your production line, that may require adding factory workers. When you set staff levels, you calculate how many more work-hours you'll need to pay for, then figure how much you'll need to earn to break even.
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