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. Examples of indirect labor positions are:
Materials handling staff
Materials management staff
Quality control staff
The cost of these types of 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.
Indirect labor also refers to many types of administrative labor positions, such as:
Any accounting position
Any marketing position
Any engineering position
The cost of these 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.