Direct Labor

Direct labor is labor that can conveniently be identified or attributed wholly to a particular job, product, or process.

Direct labor is used directly in production work to convert raw materials into finished goods. For example, it helps when altering the construction, composition, or condition of a product.

An important characteristic of direct labor is that it varies directly in relation to the volume of output.

Indirect Labor

Indirect labor is labor that cannot be conveniently identified or attributed wholly to a particular job, product, or process.

Indirect labor is used only indirectly in production work. That is to say, it represents ancillary work done in connection with the product manufactured.

Difference Between Direct and Indirect Labor

It is not possible to separate direct and indirect labor in a clear-cut way. The main reason why is that the difference is usually dependent on the nature of the industry.

For instance, labor in one industry may be classified as direct, while the same labor in another industry may be considered indirect. In distinguishing between the two, however, a simple criterion can be applied:

Labor that can be identified—distinctly and conveniently—with a particular job is direct labor; otherwise, it is indirect labor.

For example, the salary of a production inspector is conveniently and distinctly associated with a fixed point of production, and so it is classified as an item of direct labor.

However, if the same production inspector is asked to visit different production centers and also to supervise ancillary production, then this labor cost cannot be identified “easily” or “conveniently.”

In this case, the wage is classified as an indirect labor cost.

The following are general examples of indirect labor:

  • Labor for production (e.g., wages paid to the checker, crane driver, foremen, cleaners, etc.)
  • Labor engaged in service departments (e.g., staff at the powerhouse, internal transport service, security, etc.)
  • Labor engaged in the maintenance department
  • Labor and staff engaged in the storage department

Frequently Asked Questions

What is the difference between direct and indirect labor costs?

The main difference between direct and indirect labor cost is that direct labor cost is incurred when employees are directly involved in producing a product or service, whereas indirect labor cost is incurred when employees are not directly involved in producing a product or service. For example, an accountant who works in the office is not directly involved in producing the company's products or services, but their salary would be considered an indirect labor cost.

Why is it important to track indirect labor costs?

The cost of indirect labor can be a significant expense for businesses. It is important to track this cost so that it can be managed effectively.

What are some factors that can impact indirect labor costs?

Factors that can impact indirect labor costs include the number of employees, the amount of wages and salaries paid, the type of work being done, and the level of automation.

Why is it important to accurately calculate direct labor costs?

Accurately calculating direct labor cost is important for several reasons. First, it allows businesses to accurately budget for their production costs. Second, it helps businesses to identify areas where they can improve efficiency and reduce their production costs. Finally, it allows businesses to compare their production costs with those of their competitors.

Are there any methods for minimizing direct labor costs?

Yes, there are several methods for minimizing direct labor costs. One way is to outsource work to lower-cost labor markets. Another way is to use automation and technology to reduce the need for direct labor. Finally, businesses can negotiate lower wages with their employees or make changes to their benefits packages.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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.