Difference Between Direct Labor and Indirect Labor
Direct labor and indirect labor are two categories of labor costs, which are differentiated by how they contribute to the production process.
- Direct Labor: This refers to the wages paid to employees who are directly involved in the production of goods or services. They are the workers who physically manufacture a product, like assembly line workers in a factory, or provide a service, like technicians in a car repair shop. Their labor can be directly attributed to specific products or services.
- Indirect Labor: This includes the wages paid to employees whose work supports the production process but who are not directly involved in the creation of the products or services. These might include maintenance staff, quality assurance staff, equipment repair personnel, and supervisors. While their work is important to the production process, it’s harder to assign their costs directly to a specific product or service.
In terms of accounting, direct labor costs are included in the “Cost of Goods Sold” (COGS) on the income statement, while indirect labor costs are usually classified as overhead expenses. The classification of labor costs can impact the calculation of product cost and the pricing strategy of a company.
Example of the Difference Between Direct Labor and Indirect Labor
Let’s consider a car manufacturing company as an example:
Workers on the assembly line who install the engine, attach the doors, and fit the interiors of the cars are performing direct labor. Their work is directly involved in the creation of the cars, and their labor cost can be directly assigned to each car produced. If one worker earns $25 per hour and assembles 5 cars in one hour, a direct labor cost of $5 ($25/5) would be included in the cost of each car.
A maintenance worker who maintains and repairs the assembly line machinery is performing indirect labor. While their work is crucial to the production process, it’s not directly involved in creating the cars, and their labor cost can’t be directly attributed to a specific car. Their wages would be classified as indirect labor and included in the company’s overhead costs.
Similarly, the manager who oversees the production process or the quality control inspector who checks cars for defects are also performing indirect labor. Their salaries are part of the indirect costs of the car manufacturing process.
Remember that both direct and indirect labor are essential to the production process. Direct labor workers create the products, and indirect labor workers support the production infrastructure and ensure the quality and continuity of the production process.