What is Indirect Labor?
Indirect labor is referred to those set of employees who are not directly involved in the production process of finished goods or services. However, they are needed to support the production and manufacturing ecosystem, examples of which include accountants, human resources, sales, and marketing teams, etc. The cost of indirect labor is a part of the overhead cost, which also contains indirect material cost and indirect expenses.
Examples of Indirect Labor
- #1 – Production Supervisor: Production supervisor is only responsible for supervising the production process and monitor the labors directly involved in the production, but he does not play a role in the conversion of raw material into the finished goods.
- #2 – Cost Accountant: Cost accountant role responsible for assigning the cost related to the production.
- #3 – Human Resource: HR department is responsible for recruitment for all the employees in the organization, whether they are directly or indirectly related to the production.
- #4 – Sales & Marketing: These are responsible for marketing and selling the finished product into the market.
How to Calculate Indirect Labor Costs?
Let us learn how to calculate indirect labor costs with the help of the below examples.
- XYZ Inc is manufacturing three types of product which is Product name is A, B, and C. Direct material and direct labor associated with these products are different from each other. They can be easily identified, and their cost can be separately charged to the production cost. Still, indirect labor and indirect material can not be identifiable and charged directly to the cost of production. Therefore, indirect costs are apportioned amongst these three products based on no. of units produced.
- In the below example, we can see direct material and direct labor costs are charged based on per unit like for product A direct material cost is $ 5; direct labor cost is $ 3. For product B, direct material cost is $ 6, and direct labor cost is $ 4. And for product c, direct material cost is $ 10, and direct labor cost is $ 5.
- These costs are depending on the no. of units produced. Whereas indirect material and indirect labor costs are not derived on per unit basis; instead, it can be charged by dividing the total indirect labor cost with total no. of units produced then apportioned amongst all these three products and according to the no, of units produced.
- Total Indirect labor Cost = $ 150000
- Total No. of Units Produced = 7500 (2000 + 2500 + 3000)
- = 15000 / 7500 * 2000 = 40000
Similarly, for product B and product C is $ 50000 and $ 60000, respectively.
What is the Difference Between Direct Labor and Indirect Labor (IL) ?
- Direct labor can be identified with a particular cost center, and indirect labor (IL) can not be recognized with a specific cost center.
- Direct Labor is directly concerned with the productions, but IL is not directly related to the productions.
- Direct labor cost is determined based on no. of manpower hours worked or the number of units produced, but IL cost is not determined in this manner.
- Direct labor cost is more controllable as compare to indirect cost.
- Direct labor manpower can be reduced, easily, if demand will decrease, but IL cannot be reduced.
- Direct labor costs are part of the direct cost of production. In contrast, indirect labor costs form part of the overhead cost, whether it is production overhead or selling & distribution overhead or any other such overhead.
Conclusion
Indirect Labor pay vital role in overall business operation as they are involved in every stage of business like the purchase of raw material, handling of raw material & finished goods, direct labor and their supervision, arranging all the infrastructure required for production, assigning all the cost to their cost center, marketing & advertisement of the product then selling of finished goods. Still, they are directly not associated with the conversion of raw material into finished goods.
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