Difference Between Direct and Indirect Labor Cost

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 25, 2021

Direct Labor

Direct labor refers to that labor which can conveniently been identified or attributed wholly to a particular job, product or process. It is employed directly on the production work. Direct labor is that labor which is used in converting raw material into finished goods. It helps in altering the construction, Composition or condition of the product. Its main characteristics are that it varies directly in relation to the volume of output.

Indirect Labor

On the contrary indirect labor refers to that labor the general character of which is that it can not be conveniently identified or attributed wholly to a particular job, product or process. It is used indirectly on product work. It represents ancillary work done in connection with the product manufactured. It helps in production work but indirectly. It aids and facilitates production.

Difference Between Direct and Indirect Labor

However, a clear-cut difference between the two is not possible. It is relative to the nature of the industry. Labor in one unit may be classed as direct and the fame labor shall be classed as indirect in another type of unit. In distinguishing between the two a simple criterion may be applied. The labor which can be distinctly identified with a particular job and at the same time it is practical and expedient to identify the same very distinctly, then and only then it can be classed as direct one. All other labor may then be classed as indirect.
Wages of production inspector put at a fixed point of production or process certainly is direct labor. But if the production inspector is asked to visit different production centers and is also asked to supervise ancillary production as well, then this labor cost cannot easily and conveniently be identified.
Its identification shall not only be costly affairs but shall be somewhat impractical. In such a case his wages shall be classed as indirect labor cost.
In general, the following may be classed as indirect labor:
1. Shop Labor engaged for helping in production in general, e.g.. wages paid to the checker, crane driver, foremen, cleaners, etc.
2. Labor engaged in service departments such as the staff of powerhouse, internal transport service, Sate and security, etc.
3. Labor engaged in the maintenance department.
4. Labor and staff engaged in the stores department etc.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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