Indirect Labor

Indirect labor is a term used in accounting and is a type of cost used in cost accounting. Labor costs to build a product or service are separated into direct labor and indirect.

Direct labor directly adds value to the product or service. This type of labor takes materials and machines it, or assembles it, etc to make it worth more than it was worth before.

Indirect on the other hand is necessary in the production process, but this person does not add any value to the product. This person will repair machinery and move the product with a fork truck, etc

Some of the jobs that are in this classification are:
  • Machine Repair
  • Fork Truck Driver
  • Machine Set Up
  • Inspector
  • Tool & Die

Indirect costs are actually part of what cost accountants called burden costs. Usually, these costs are allocated to a product or service based on a method that the cost accountant has come up with.

Usually direct labor will keep track of the time they spend on a particular job or product. This is accomplished by punching a time clock or writing down the time spent on the job.

Indirect labor fork truck driver Indirect on the other hand is involved in working on many jobs and their time is harder to allocate to a particular job. For example, a fork truck driver may move many different products around in a day. Some fork lift drivers spend time bringing parts to a line for assembly, and then may load trucks for shipment.

A burden rate that charges costs for indirect costs and other costs is developed. Some of the ways these costs may be applied may be based on the complexity of a product, the number of direct labor people involved in making the product, the amount of space the product takes up on the manufacturing floor, etc.

Another method to allocate these costs is ABC or activity based costing. With this method of costing, the indirect people may keep track of the actual time spent on a particular product or job. This is much more accurate that including indirect labor in burden rates, but involves more work in collecting the data.