Indirect Labor

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Indirect Labor?

Indirect labor refers to employees who are not directly involved in the production process of finished goods or services. However, they must support the production and manufacturing ecosystem, including accountants, human resources, sales, marketing teams, etc.

Indirect Labor

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Thus, indirect labor cost is a part of the overhead cost, comprising indirect material and indirect expenses. Include area accounting, engineering, human resource, or administrative work. People working in these fields do not contribute hands-on to converting raw materials into finished goods. Such labor costs are the overhead costs of direct and indirect materials.

Key Takeaways

  • Indirect labor refers to employees not directly involved in the finished goods or services production procedure. Nevertheless, they must back the production and manufacturing ecosystem along with accountants, human resources, sales, marketing teams, etc.
  • Indirect labor cost is included in the overhead cost that consists of indirect material and indirect expenses.
  • The indirect labor examples are the production supervisor, human resource, cost accountant, sales, and marketing.
  • Direct labor can be analyzed with a specific cost center, while indirect labor (IL) cannot be identified with a particular cost center.

Indirect Labor Explained

Indirect labor helps in producing goods and services but are not directly or actively involved in converting raw materials into finished goods. They mainly include material handling, purchase and management staffs, supervisors or people who are responsible for quality maintenance, accounting, administrative work or even human resource management.

It plays a vital role in overall business operation as it is involved in every stage of business like the purchase of raw material, handling of raw material and finished goods, direct laborDirect LaborDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more and their supervision, arranging all the infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more required for production, assigning all the cost to their cost center, marketing and advertisement of the product, and selling of finished goods. However, they are not directly associated with converting raw materials into finished goods; the costs are known as indirect labor overhead.

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Types

Let us look at the types of indirect labour in cost accounting.

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How To Calculate?

Let us learn how to calculate indirect labour in cost accounting with the help of the below examples.

You can download this Indirect Labor Excel Template here – Indirect Labor Excel Template

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  • XYZ Inc manufactures three types of products – A, B, and C. Direct material and direct labor associated with these products differ. However, they can be easily identified, and their cost can be separately charged to the production cost. However, indirect labor and material can not be identifiable and charged directly to the cost of production. Therefore, indirect costs are apportioned amongst these three products based on the number of units produced.

Example

Let us go through the example of indirect labour to understand the concept.

In the below example, direct material and direct labor costs are charged per unit of product A. Its direct material costDirect Material CostDirect Material Cost is the total cost incurred by the company in purchasing the raw material along with the cost of other components including packaging, freight and storage costs, taxes, etc. that are related directly to the manufacturing and production of various products of the company.read more is $5, and its direct labor cost is $3. For product B, the direct material cost is $6, and the direct labor cost is $4. And for product C, the direct material cost is $10, and the direct labor cost is $5.

These costs depend on the number of units produced. At the same time, indirect material and indirect labor overhead are not derived on a per-unit basis. Instead, it can be charged by dividing the total indirect labor cost by the total number of units produced and then apportioning it amongst these three products according to the number of units produced.

Total indirect labor cost = $150,000

Total no. of units produced = 7,500 (2,000 + 2,500 + 3,000)

Indirect Labor Cost for Product A = Total Indirect Labor cost / Total No. of Units Produced * No. of Units for Product A
  • = 15,000 / 7,500 * 2,000 = 40,000

Similarly, it will be $50,000 and $60,000 for products B and C, respectively.

Example of Indirect Labor

The above mentioned example of indirect labour gives a clear idea about the concept.

Direct Labor Vs Indirect Labor(IL)

Some basic differences between direct and indirect labour is given below:

Thus, the above are the differences between direct and indirect labour.

Frequently Asked Questions (FAQs)

Is indirect labor included in manufacturing overhead?

Yes, indirect labor is included in the manufacturing overhead since these costs cannot be given to any particular project or service.

Who are indirect labor?

Indirect labor is those employees who work towards contributing to the company’s performance outside of producing products and services. In addition, they work in sections like administration, accounting, and engineering departments.

What is a good ratio of direct to indirect labor?

Majorly in companies, the direct and indirect labor ratio is about 3 to 1. Moreover, the prominent companies get closer to 4 to 1.

Why is it called indirect labor?

Labor such as clerks, repairers, and maintenance men are indirectly concerned about a product in the manufacturing procedure. Therefore, the cost is not measurable, recognizable, or chargeable directly to any particular product compared to direct labor.

This article has been a guide to what is Indirect Labor. We explain it with example, differences with direct labor, how to calculate it and its types. You may also take a look at the following articles:-

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