Indirect labor costs

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Indirect labor costs
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Indirect labor costs include various forms of payroll taxes, insurance and a wide range of additional employee benefits[1]They cannot be identified with the individual cost centre and is incurred for those employees who are not engaged in the manufacturing process but only assist[2].

Types of indirect labor costs

Indirect labor expense involves[3]:

  • forms of payroll taxes
  • insurance
  • additional employee benefits

Employer's participation based on the payroll: insurance against unemployment, social insurance, contractor liability insurance and property damage as well as employee compensation insurance.


These costs are significant, often from 35 to 55 percent of the supplements to direct wage costs. The most important in the project is to consider the presence of indirect labor costs - it is less important when and how they arise[4]. Companies can distinguish direct and indirect labor costs so that they can measure the effectiveness or efficiency of their employees, which entails studying how long an employee lasts to produce one unit. If productivity starts to get below the target levels, action can be taken to improve performance[5].


For estimation purposes, the total workload can be calculated in one operation using hourly labor costs are often calculated separately when labor prices are estimated. A common rule is to add a percentage of allowance to the total intermediate direct operation to the other, it may be advantageous to calculate indirect costs run at the same time the direct labor cost is achieved for the service[6].

Direct labor costs

Direct labor costs are wages paid to employees who produce products physically. In other words, these costs are the costs paid to employees who make the products that they produce sell[7]. There is a subtle difference between direct labor and direct labor costs. Work refers to the actual work done by employees to produce products. Labor costs refer to the amount of money that the employer pays employees for doing the job[8].


  1. Sears S. K.,2008, p.46
  2. Colin A., 2008, p.46
  3. Sears S. K.,2008, p.46
  4. Sears S. K.,2008, p.46
  5. Gildersleeve R.,1999, p107-107
  6. Sears S. K.,2008, p.46
  7. Chiang B.,2013, p.86
  8. Holloway D. M.,2016, p.44


Author: Agnieszka Katarzyna Sikora