Here we are not only talking about laborers like street sweepers, tunnel drillers, welders, electricians, plumbers etc, but about every person who is employed under an employer or a contractor, drawing money for the work performed. Essentially, We have to differentiate these labor costs into direct or indirect and put them in different buckets. This is a good cost accounting practice which brings in numerous benefits for the company and this will be discussed in detail, in another post, Benefits of classification of labor costs into direct and indirect.
Classification of Direct labor cost and Indirect labor cost is fairly simple. Here goes the two main points, to be taken into account while classifying them.
Wages paid to any laborers involved directly in production of the product, an activity, contract, cost center or process/ rendering of service is the direct labor.
Wages paid to laborers who are not involved directly in production of the product/ rendering of service is indirect labor.
Lets try to understand this with an example. In a manufacturing company, a laborer working on a factory line is the direct labor, whereas a laborer working as an accountant is an indirect labor.
Direct Labor cost is included in calculating the product cost. For instance, a company manufacturing potato chips would include, apart from the raw material cost, the labor cost involved in production of potato chips as well in the total manufacturing cost of say, 1 kg of potato chips. Whereas, the salary of an accountant will not be included in the cost of 1 kg potato chips. This cost will be dealt with separately.
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