The accounting departments of companies that manufacture products distinguish between direct and indirect labour costs on their balance sheet. Direct labour costs are tied directly to production while indirect labour costs involve those that serve a more ancillary or support function.
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By definition, direct labour costs are expenditures that directly involve the conversion of raw materials into a finished product. Contrarily, indirect labour costs are all other labour costs outside of the production process.
Types of Direct Labor Costs
Direct labour costs can include wages of factory workers, engineers, quality control, machine operators, raw materials delivery people and other production-related employees. Direct labour costs are usually considered a variable expense.
Types of Indirect Labor Costs
Janitors, maintenance workers, supply room supervisors, sales people, secretaries and marketing people are considered indirect labour employees. They support the manufacturing process but do not directly affect production.
Companies differentiate between direct and indirect labour costs so that they can measure the efficiency or productivity of their workers, which entails studying how long, on average, it takes a worker to produce one unit, according to the article "Allocation of Direct Labor" at Internalaccounting.com. Measures can then be taken to improve productivity if it falls below target levels.
Direct labour costs are also used to figure the cost of goods sold, which is one of the key expenses for a manufacturer. Indirect expenses are generally reported by separate departments. Separating the two types of labour costs can help determine where, if any, misuse or misallocation of resources occurred.
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