Indirect LaborLabor not directly attributable to a particular product or service

There are certain kinds of labor that you can directly attribute to the production of goods or the performance of services.

We refer to these as direct labor.

An example would be those working on the assembly line of a factory.

The cost of direct labor contributes to the final cost of a product or service.

Typically, you can directly attribute direct labor to a particular product or service.

Then there’s labor that isn’t directly attributable to the production of goods or the performance of services.

However, they support or enable such functions.

For example, we have maintenance workers that make sure that the machinery and equipment used in the manufacturing of goods are in working condition.

Another example would be the plant supervisors and plant managers that oversee plant operations.

We refer to this type of labor as indirect labor.

While indirect labor isn’t directly attributable to a particular product or service, it still contributes to the final cost of such a product or service.

It is typically a component of a manufacturer’s overhead cost. As such, it’s important to understand what indirect labor is and what contributes to its cost.

In this article, we will be learning about indirect labor.

How does one define indirect labor?

What contributes to the cost of indirect labor?

How does indirect labor contribute to the final cost of a product or service?

Is indirect labor a necessary expense?

Is it avoidable? We will try to answer these questions and more as we go along with the article.

What is Indirect Labor?

Before we define indirect labor, we must understand first what labor is.

The Merriam-Webster Dictionary defines labor as the human activity that provides goods or services in an economy.

The same dictionary also defines labor as an economic group comprising those who do manual labor or work for wages.

From such definitions, we can infer that labor is a human component.

Particularly, labor refers to the total manpower and expertise required for the completion of a job.

We can further categorize labor into direct and indirect labor.

Direct labor refers to labor directly attributable to the completion of a job.

On the other hand, indirect labor refers to labor that is not directly attributable to the production of goods or the performance of services.

In other words, indirect labor refers to employees/workers who do tasks outside of producing goods or performing services.

Now while indirect labor doesn’t directly contribute to the production of goods or performance of services, it still contributes to a business’s overall performance.

In a manufacturing setting, indirect labor performs functions that support the direct labor in the performance of their work.

Other than that, indirect labor may involve itself in administrative functions such as HR, accounting, etc.

Depending on their function, indirect labor may form part of the factory/manufacturing overhead cost or operating expenses.

Indirect labor that does tasks that support the production of goods forms part of factory/manufacturing overhead cost.

For example, plant supervisors and plant managers oversee plant operations to ensure efficiency.

Their functions support the production process.

As such, the cost of their salaries and wages forms part of the factory/manufacturing overhead cost or operating expenses.

On the other hand, accountants do tasks that don’t contribute to the production process.

As such, their salaries and wages form part of the business’s operating expenses.

Examples of Indirect Labor

Indirect labor typically involves tasks that support the performance of a business.

Depending on the tasks, the cost of indirect labor may form part of the manufacturing overhead costs or operating expenses.

Indirect labor that does functions that support the production process will form part of the factory/manufacturing overhead costs.

Examples of such indirect labor include the following:

• Plant supervisors and managers that oversee the plant operations
• Maintenance workers that maintain the machinery and equipment used in the manufacturing of goods
• Quality assurance workers that check the quality of products
• Purchasing staff that handles the purchasing of materials for the production of goods
• Materials management staff that manages the inflow and outflow of materials
• Security guards that maintain the security of the manufacturing facility

Indirect labor that does functions that don’t contribute to the production process will form part of the business’s operating expenses.

Examples of such indirect labor include the following:

• Accountants and accounting staff that do accounting functions
• Marketing staff in charge of promoting and marketing the business’s products and services
• Administrative staff that do administrative functions
• The business’s legal adviser/s
• HR staff that take care of HR concerns
• The business’s president who oversees the business as a whole
• IT staff that take care of the business’s IT system

It’s important to distinguish whether the cost of indirect labor will form part of the manufacturing overhead costs or operating expenses.

This is because manufacturing overhead costs contribute to the final cost of a product. On the other hand, operating expenses do not.

What Contributes to The Cost of Indirect Labor?

The cost of indirect labor will typically include all kinds of compensation that the employees that do indirect labor receive.

This includes salaries, wages, and other benefits such as medical benefits, life insurance, etc.

Direct Labor VS Indirect Labor

Direct labor refers to labor that is directly attributable to the production of goods or the performance of services.

For example, the masseur at a massage place in charge of providing massages is direct labor.

Another example would be workers in a factory assembly line.

Whereas, indirect labor refers to labor that is outside of producing goods or performing services.

Depending on the function, indirect labor may or may not support the production process.

For example, plant supervisors oversee plant operations. This function supports the production process.

On the other hand, accountants do the accounting function of the business.

This function does not contribute to the production process.

Since direct labor is directly attributable to the production of goods or performance services, its costs will always contribute to the final costs of such goods or services.

Additionally, direct labor may be directly traced to particular good or service.

On the other hand, indirect labor may or may not directly contribute to the final cost of goods.

The cost of indirect labor that forms part of the manufacturing overhead costs will contribute to the final cost of goods.

Whereas, the cost of indirect labor that forms part of the operating expenses will not. In both cases, indirect labor cannot be directly traced to a particular good or service.