Direct and Indirect Labor Cost
What Is Labor?
Labor is defined as the cost of services involving human resources. Noteworthily, labor is also the most mobile factor in production.
There are two broad types of labor:
- Direct labor
- Indirect labor
Direct labor refers to labor that is directly involved in the production of a good. For example, in a small carpentry business, the efforts of individuals who cut, join, polish, or handle wood are classified as direct labor.
Remuneration paid to persons providing direct labor is called direct wages.
In manufacturing concerns, where the bulk of raw materials processing is completed by machines, direct wages refer to the remuneration paid to employees who operate the machines.
Such employees, however, do not include supervisors or clerical staff. These personnel assist direct labor but do not actually provide it.
Indirect labor is labor that assists direct labor in the performance of their work. It is labor that is not directly involved in manufacturing the finished product.
Examples of indirect labor are wages paid to workers for sweeping, cleaning, supervising, inspecting, and issuing raw materials.
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.