Indirect labor definition

What is Indirect Labor?

Indirect labor is the cost of any labor that supports the production process, but which is not directly involved in the active conversion of materials into finished products. Depending on the complexity of an organization’s production and materials sourcing operations, indirect labor can be greater than the direct labor incurred in its production activities.

Examples of Indirect Labor

Examples of indirect labor positions that can be included in factory overhead are the production supervisor, purchasing staff, materials handling staff, materials management staff, and quality control staff. Indirect labor also refers to many types of administrative labor positions, such as any accounting, marketing, or engineering position.

Accounting for Indirect Labor

The cost of production and materials management indirect labor are charged to factory overhead, and from there to the units of production manufactured during the reporting period. This means that the cost of indirect labor related to the production process ends up in either ending inventory or the cost of goods sold. The cost of administrative labor positions cannot be traced to production activities, and so are charged to expense as incurred.

The cost of both types of indirect labor can be fully loaded with the costs of benefits and payroll taxes for financial analysis or cost accounting purposes, since these additional costs are closely associated with the indirect labor positions.

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