Indirect labor

Indirect labour is a force that is not directly related to production activity and its task is to support it. Among the indirect workforce there are salaries for employees, inspectors or guardians. Indirect labour is one of the elements of the overheads, which also includes indirect expenses and indirect materials.

International Capital Market Association defines overhead as "an aggregate of indirect materials, indirect wages and indirect expenses".

It is also important that the work indirectly cannot be directly assigned to a specific product, process or activity. It applies to all employees who are not involved in the process of processing raw materials into the final, finished product .

Difference between direct labor and indirect labor

The difference between indirect work and direct work is that direct work can be assigned to a specific task, machine, worker or product. By contrast, indirect labour is expressed as an element of overheads which have to be included in the cost of production .

Direct labor payment methods

We can distinguish three main methods of direct labour remuneration:

1. time rate, also called basic salary, is the type of salary an employee receives for the time he has spent at work. Every overtime, e.g. after working hours or on Saturdays or public holidays, is additionally remunerated, e.g. double counting, etc.;
2. piecework rate, which means the remuneration for the amount of e.g. finished finished products, then the employee receives a sum for the amount of products made on a given day, not for the amount of hours that he or she devoted to it;
3. bonus system is an additional remuneration (in addition to the basic salary) for the performance bonus faster than expected, the prize is then awarded as a percentage of the money saved by the faster performance of the task.

Examples of Indirect labor

• Maintenance personnel: Maintenance personnel are responsible for the day-to-day upkeep of the production facility. This includes cleaning, minor repairs and maintenance, and ensuring that all safety equipment and protocols are properly followed.
• Supervisory personnel: Supervisory personnel are responsible for overseeing the activities of the direct labor force. This includes providing direction and guidance, monitoring progress, and ensuring that all safety standards are met.
• Administrative personnel: Administrative personnel are responsible for handling all the paperwork related to the production process, such as ordering supplies, invoices, and payroll.
• Security personnel: Security personnel are responsible for ensuring that the production facility is safe and secure. This includes monitoring the grounds, controlling access to the facility, and responding to any security incidents.
• Management personnel: Management personnel are responsible for the overall management of the production process, including setting goals and objectives, managing personnel, and making decisions about production strategies.

Advantages of Indirect labor

Indirect labor offers several advantages for businesses. These include:

• Improved efficiency: Using indirect labor can help reduce overhead costs and improve the efficiency of production. Indirect labor can help to streamline production processes, eliminate bottlenecks, and reduce waste.
• Increased productivity: Indirect labor can help to increase the overall productivity of a business by providing skilled workers who can handle specialized tasks. This can result in improved output and better quality products.
• Lower costs: Indirect labor is typically lower cost than direct labor, since it does not require the same level of training and expertise. This can help to reduce labor costs and increase profits.
• Reduced turnover: Since indirect labor is typically less expensive than direct labor, businesses can reduce turnover by hiring and retaining indirect labor for longer periods of time. This can also help to reduce costs associated with training new workers.

Limitations of Indirect labor

Indirect labor can present certain limitations in production. These include:

• Difficulty in determining the exact cost. As most indirect labor is not directly related to production, it can be difficult to accurately calculate the cost of it.
• Difficulty in tracking and measuring performance. As the activities of the indirect labor force are not related to production, it can be difficult to measure and track the performance of the indirect labor force.
• A lack of accountability. As it is not directly related to production, there is no direct accountability for the performance of the indirect labor force.
• The potential for increased expenses. As the cost of indirect labor is not easily determined, there is the potential for increased expenses due to the difficulty in assessing the value of the indirect labor.

Other approaches related to Indirect labor

Indirect labour is an essential factor for successful production, and there are various approaches related to it. These include:

• Labour cost control - This involves analyzing labour costs and finding ways to reduce them. This can be achieved by streamlining processes, improving employee efficiency, and cutting down on overtime.
• Job evaluation - This involves assessing the nature of a job and its responsibilities and then assigning a salary range to it. This helps to ensure that employees are paid fairly and that they are properly compensated for their work.
• Performance management - This involves setting performance standards and then evaluating employees against those standards. This helps to ensure that employees are productive and that they are meeting the company's expectations.
• Training and development - This involves providing employees with the necessary skills and knowledge to perform their jobs effectively. This helps to ensure that employees are able to stay on top of new technologies and work processes.

In summary, there are a variety of approaches related to indirect labour, all of which are designed to ensure that production runs efficiently and that employees are fairly compensated for their work.

Footnotes

Indirect labor — recommended articles

Direct labor — Uniformity of production — Direct labor cost — Outsourcing and offshoring — Direct labor efficiency variance — Operational controlling — Indirect labor costs — Production reserve — Cost tracking

References

• Anbarasu J. (2008), Overhead
• Chiang B. (2013), Indirect Labor Costs and Implications for Overhead Allocation, "Accounting&Taxation". Vol.5, nr. 1
• Cox D. (2016),Management Accounting: Costing Tutorial, Osborne Books
• Elementary Cost Accounting (2019),Basic Cost Concepts
• Jain P., Bhati A. (2015), Cost Accounting and Cost Control System in Textile Industry in India, Department of Accountancy and Business Statistics, Jaipur
• Labor Costs Interpretive (2015), Labor Costs Interpretive Guidance, California Department of Transportation
• Labour Costs (2016),Labour Costs and Methods of Control
• Palazzi P., Piacentini P. (1986), Direct and Indirect Labor and Demand for Workers and Working Hours, "Rivista Internazionale di Scienze Economiche Commerciali", vol. 33, n. 12
• Walther L.M., Skousen J.C. (2009),Managerial and Cost Accounting

Author: Julia Kręcioch