- Glossary
- Indirect Labor Costs
Indirect Labor Costs
The cost of labor that isn't directly connected to the creation of commodities or the delivery of services is known as indirect labor cost. It refers to the compensation given to employees whose tasks make it possible for others to manufacture things and render services.
Indirect labor costs are not as easily correlated with particular units as direct labor costs. Supervisors, accountants, security guards, and cleaners are among the managerial and administrative employees who make up this group of workers.
Example of Indirect Labor
Assume you are the proprietor of a construction business. While thinking about contracts, take both direct and indirect work into account. It is simple to understand direct labor cost. It refers to the costs you pay for laborers, riggers, foremen, and pipefitters who directly work on the projects, such as wages and other benefits.
Employees who are not directly involved in planning or building projects are referred to as indirect labour. They do participate in the day-to-day operations of the company, though. This covers such areas as human resources, management, accounting, and customer relations.
Examples of Indirect Labor include:
- Office manager, clerks, and other employees
- Administrative directors
- Legal advisor
- Cost accountants and financial accountants
- Quality control staff
- Drivers of delivery vans
- Packers and dispatch staff
Differences between Direct Labor and Indirect Labor
IL is unrelated to the productions, whereas direct labor is immediately affected by them.
IL costs are not computed in the same way as direct labor costs, which are established based on the quantity of hours worked or units produced.
In the event of a decline in demand, the workforce engaged in direct labor can be readily reduced, but IL cannot.
One of the direct production expenses is the cost of labor. Contrarily, indirect labor costs are included in overhead costs regardless of whether they are associated with production, sales, distribution, or any other overhead.
The Role Of Direct & Indirect Costs
Budgeting and planning are greatly aided by an understanding of the distinction between direct and indirect labor. Here are a few explanations:
- To assess the workers' productivity and efficiency
- To identify resource misuse or improper allocation
- To comprehend how profitable each individual good and service is
- To determine individual goods and service costs
- Cost-benefit and return-on-investment analyses, as well as other business case analysis expenses, should be estimated
How to Calculate Indirect Labor?
Accounting treats indirect labor costs as overheads, same like other indirect costs. Either they are deducted from earnings in the period in which they are incurred or, using a fixed overhead rate, they are assigned to a cost object.
Below are the requirements for calculating indirect labor:
- An employee's total amount of hours worked is approximately 2,000 if they worked 40 hours per week for 50 weeks out of the year.
- Subtract the total amount of time spent annually on vacations, sick days, training, and seminars.
The remaining hours represent the total number of hours that one employee engaged in indirect labour.
Conclusion
Since it is involved in every stage of business, including the purchase of raw materials, handling of raw materials and finished goods, direct labor and their supervision, setting up all necessary production infrastructure, allocating all costs to their respective cost centers, marketing and advertising of the product, and selling of finished goods, indirect labor is essential to the overall operation of businesses. They are not, however, actively involved in turning raw materials into final goods.
