Definition
Indirect labour cost refers to the expenses related to the compensation of employees who do not directly engage in the manufacturing or production of goods and services but perform tasks essential for supporting these activities. Examples include wages, bonuses, and other forms of remuneration for maintenance workers, supervisors, quality control inspectors, and administrative staff. These costs are considered part of the overhead expenses and are allocated to the cost of goods sold or production activities.
Examples
- Maintenance Workers’ Wages: The salaries paid to maintenance personnel who ensure that machinery and equipment are operational.
- Quality Control Inspectors’ Salaries: Compensation given to staff responsible for inspecting products to ensure they meet quality standards.
- Supervisors’ Bonuses: Additional remuneration provided to supervisors who oversee production processes.
- Administrative Assistants’ Wages: Salaries of administrative staff supporting various departments within the organization.
Frequently Asked Questions (FAQs)
What distinguishes indirect labour costs from direct labour costs?
Indirect labour costs refer to expenses related to employees who support the production process but do not directly work on the product, such as maintenance workers or administrators. In contrast, direct labour costs are incurred for workers who are directly involved in manufacturing or producing goods.
How are indirect labour costs treated in accounting?
Indirect labour costs are typically classified as overhead expenses and allocated to the total cost of goods sold or production, usually through predetermined overhead rates.
Can indirect labour costs vary from month to month?
Yes, indirect labour costs can fluctuate depending on factors such as overtime hours, bonuses, or changes in workforce levels.
Why is it important to track indirect labour costs accurately?
Accurate tracking of indirect labour costs helps in better cost management, budgeting, pricing strategies, and financial decision-making. It ensures that the true cost of production is reflected in financial statements.
Are indirect labour costs part of manufacturing overhead?
Yes, indirect labour costs are a component of manufacturing overhead, which also includes other indirect costs like utilities, rent, and equipment depreciation.
Direct Labour
The portion of wages paid to workers who are actively engaged in the manufacturing or production process.
Manufacturing Overhead
All manufacturing costs that are not direct materials or direct labour, including indirect labour costs, utilities, and equipment depreciation.
Cost Allocation
The process of identifying, aggregating, and assigning costs to cost objects, such as departments, products, or projects.
Overhead
Indirect costs that are not directly traceable to a specific product or service, including indirect labour, materials, and expenses.
Online References
- Investopedia - Indirect Labor
- Accounting Tools - Indirect Labor Definition
Suggested Books for Further Studies
- Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- Managerial Accounting by Ray H. Garrison, Eric Noreen, and Peter C. Brewer
- Financial and Managerial Accounting by Jan R. Williams, Susan F. Haka, Mark S. Bettner, and Joseph V. Carcello
Accounting Basics: “Indirect Labour Cost” Fundamentals Quiz
### Which of the following is a typical example of an indirect labour cost?
- [ ] Machine operator’s wages
- [ ] Assembly line worker’s salary
- [x] Quality control inspector’s salary
- [ ] Raw materials handler’s wages
> **Explanation:** An indirect labour cost is associated with employees who support the production process but do not directly work on the product. A quality control inspector’s salary fits this description.
### Where in the financial statements are indirect labour costs recorded?
- [ ] As part of raw material costs
- [ ] As an asset
- [x] As part of overhead expenses
- [ ] As direct labour costs
> **Explanation:** Indirect labour costs are recorded as part of overhead expenses on the financial statements, as they cannot be directly traced to a specific product.
### Which department’s labour costs would typically be classified as indirect?
- [ ] Manufacturing
- [x] Maintenance
- [ ] Direct production
- [ ] Raw materials processing
> **Explanation:** Labour costs from the maintenance department are classified as indirect since maintenance workers support production without directly engaging in it.
### What is the primary purpose of allocating indirect labour costs in accounting?
- [ ] To classify them as direct materials
- [x] To accurately reflect the true cost of production
- [ ] To increase net income
- [ ] To reduce operational costs
> **Explanation:** The primary purpose of allocating indirect labour costs is to accurately reflect the true cost of production, which aids in financial decision-making and reporting.
### Are salaries of HR personnel considered indirect labour costs?
- [x] Yes, they support but do not directly involve in production
- [ ] No, they are direct labour costs
- [ ] Not typically considered in labour costing
- [ ] Only in certain accounting systems
> **Explanation:** HR personnel's salaries are considered indirect labour costs as they support the organization but do not directly engage in the production of goods.
### How does the fluctuation of overtime affect indirect labour costs?
- [ ] It does not affect indirect labour costs
- [x] It can cause a significant variation in monthly indirect labour expenses
- [ ] Only affects direct labour costs
- [ ] Only affects non-labour costs
> **Explanation:** Overtime can cause indirect labour costs to vary since additional time worked by indirect labour can increase remuneration costs.
### What role do indirect labour costs play in cost allocation?
- [x] They are part of the overhead allocated to products/services
- [ ] They are ignored in cost allocation
- [ ] They reduce total production costs
- [ ] They are allocated as direct costs
> **Explanation:** Indirect labour costs are part of the overhead that is allocated to various products or services to determine their true cost.
### Why might a company want to reduce its indirect labour costs?
- [ ] To increase overhead costs
- [x] To improve overall cost efficiency
- [ ] To decrease direct costs
- [ ] To increase labour turnover
> **Explanation:** Reducing indirect labour costs can improve overall cost efficiency, thus enhancing the company’s profitability.
### Which factor would most likely lead to increased indirect labour costs?
- [ ] Decreased production levels
- [ ] Reduced maintenance requirements
- [x] Increased need for supervision
- [ ] Lower clerical workload
> **Explanation:** An increased need for supervision would likely increase indirect labour costs, as supervisory roles are classified under indirect labour.
### How are indirect labour costs usually classified in managerial accounting?
- [ ] As part of direct costs
- [x] As part of overhead costs
- [ ] As non-recoverable expenses
- [ ] As variable costs only
> **Explanation:** In managerial accounting, indirect labour costs are classified as part of overhead costs, encompassing various supporting and administrative activities.
Thank you for taking this educational journey into the realm of accounting and labour costs! Continue developing your financial acumen for a prosperous career!
