What is Indirect Labor?

Examples of Indirect Labor

  • Production Supervisor: The production supervisor is only responsible for supervising the production process and monitoring the laborers directly involved in the production, but they do not play a role in converting raw materialRaw MaterialRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished goods.read more into finished goods.Cost Accountant: The Cost accountant roleCost Accountant RoleCost Accounting is a managerial accounting element that calculates the total production cost of a Company by including both variable (supplies & labour expenses) & fixed (rent & lease expenses) costs. Moreover, there are several lucrative career options in Cost Accounting like Cost Accountant, Budget Analyst, & Cost Estimator etc. read more is responsible for assigning the cost related to the production.Human Resource: The HR department is responsible for recruiting all the employees in the organization, whether directly or indirectly related to the production.Sales & Marketing: These are responsible for marketing and selling the finished products into the market.

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Calculate Indirect Labor Costs

Let us learn how to calculate indirect labor costs with the help of the below examples.

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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.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 costs 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 = $150,000Total no. of units produced = 7,500 (2,000 + 2,500 + 3,000)

  • = 15,000 / 7,500 * 2,000 = 40,000

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

What is the Difference Between Direct Labor and Indirect Labor (IL) ?

  • Direct labor can be identified with a particular cost centerCost CenterCost center refers to the company’s departments that don’t contribute directly to the corporate revenue; however, the firm has to incur expenses for keeping such units operative. It comprises research and development, accounting and human resource departments.read more, while 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 the number of hours worked or units produced, but IL cost is not calculated in this manner.The direct labor workforce can easily be reduced if demand decreases, 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, selling, distribution, or any other overhead.

Conclusion

Indirect labor 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 directly not associated with converting raw materials into finished goods.

This article has been a guide to what indirect labor is and its definition. Here we explain how to calculate this cost along with examples. You may also take a look at the following articles:-

  • Cost of LaborLabor MarketIndirect Costs CalculationDirect Cost vs Indirect Cost