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.
Some
of the
jobs that are in this classification are:
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 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.