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 as follows:

Production supervisor. This person oversees the manufacturing operation, including the manning of workstations and the training of production employees.
Purchasing staff. These people are responsible for the timely procurement of all materials and services needed by a business.
Materials handling staff. These people are responsible for receiving goods at the receiving dock, putting them away in the warehouse, transferring them from there to the production floor, and then shifting finished goods back to the warehouse.
Quality control staff. These people are responsible for the testing of materials, in-process goods, and finished goods, to ensure that they meet the company’s quality parameters.

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 in the period 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.