Employee Cost, and Direct Expenses

In one line

Employee cost is the whole cost of employing people, not just the wage; direct expenses are the costs other than material and labour that can still be traced to a cost object.

What employee cost includes

It is not the take-home pay, and it is not even the gross wage. It is everything the employer spends because a person is employed.

CAS-7 Employee Cost is the standard on this. Its requirement, in our own words, is that employee cost be measured at the gross payments made to and on behalf of employees, including the employer's contributions and the benefits attributable to the period, net of recoveries from employees, with abnormal costs excluded and the basis of any allocation disclosed.

The principle to carry: the employer's cost, not the employee's receipt.

Direct and indirect employee cost

Direct labour is traceable to the cost object economically - the machinist on the job, the tailor on the garment. It enters prime cost.

Indirect labour cannot be so traced - the supervisor, the storekeeper, the sweeper, the maintenance fitter. It enters factory overhead.

The same person can be both in the same week: a fitter working on a job is direct for those hours and indirect for the hours he spends on general maintenance. The time booking records decide, which is why the next chapter is about them.

Direct expenses

Direct expenses are expenses other than material and labour which can be traced to a cost object. They complete prime cost, and they are the smallest of its three parts.

Examples that MU sets:

• royalty paid per unit produced;
• hire of a special plant or tool for one job;
• the cost of a special design, drawing or mould made for one order;
• fees paid to a consultant for a particular job;
• carriage on a special material bought for one order;
• cost of patents or licence fees relating to specific production.

CAS-10 Direct Expenses requires, in our own words, that direct expenses be determined at the invoice or agreed price net of recoverable taxes and discounts, identified with the cost object, with abnormal and non-recurring items excluded.

The test is traceability, not size. Royalty of a few paise a unit is a direct expense because it is traceable; factory rent of lakhs is not, because it is not.