Indirect Labor: What It Is, Examples, and How to Calculate It

Every business relies on labor to operate—but not all labor is created equal from an accounting perspective. While most people understand the idea of direct labor (workers who directly produce goods or services), indirect labor is often overlooked. However, it plays a crucial role in keeping operations running smoothly.

Indirect labor includes the work performed by employees who support production, but don’t directly handle the creation of goods or services. These roles are essential, even if they aren’t on the assembly line.

In this article, we’ll explore what indirect labor is, how it differs from direct labor, examples across industries, and how to calculate and manage these costs effectively.

What Is Indirect Labor?

Indirect labor refers to the work done by employees who assist or support the production process but do not directly create products or deliver services. Their efforts are necessary for business operations but cannot be traced to a specific unit of output.

Accounting Definition:

Indirect labor is classified as an overhead cost in managerial and cost accounting. It’s included in the manufacturing overhead or operating expenses section of a company’s income statement.

Examples of Indirect Labor

Here are common examples of indirect labor in different types of businesses:

In Manufacturing:

Maintenance technicians
Quality control inspectors
Plant supervisors
Warehouse managers
Security personnel

In Office or Corporate Settings:

Human resources staff
IT support
Administrative assistants
Accountants
Janitorial services

In Retail:

Inventory clerks
Store managers
Cash office employees
Customer service reps (support roles)

In Restaurants:

Restaurant managers
Dishwashers
HR and payroll staff
Marketing and scheduling coordinators

These workers help the business function but don’t produce tangible goods or perform the primary service that generates revenue.

Indirect Labor vs. Direct Labor: Key Differences

Feature	Direct Labor	Indirect Labor
Directly tied to product/service?	Yes	No
Traceable to the unit of output?	Yes	No
Reported as part of COGS?	Yes (Cost of Goods Sold)	No (included in overhead)
Examples	Assembly line worker, chef	Supervisor, HR staff, janitor
Classification in accounting	Variable cost	Fixed or semi-variable cost (overhead)

Why Indirect Labor Is Important to Track

Even though it doesn’t directly contribute to production, indirect labor has a real impact on profitability.

Benefits of Tracking Indirect Labor Costs:

Improves cost accounting accuracy
Helps allocate resources more efficiently
Identifies opportunities for automation or optimization
Aids in calculating product margins correctly
Essential for budgeting, forecasting, and pricing strategies

Businesses that ignore or misallocate indirect labor may underestimate total costs and make poor operational decisions.

How to Calculate Indirect Labor Costs

To calculate indirect labor, follow these basic steps:

Identify Indirect Roles

List employees not directly involved in production or service delivery.

Gather Compensation Data

Include wages, payroll taxes, and benefits (healthcare, bonuses, etc.).

Determine Work Hours

Track the number of hours worked in support functions.

Calculate Total Indirect Labor

Use the formula:

Indirect Labor Cost = (Hourly Rate + Benefits Rate) × Indirect Hours Worked

Example:

2 warehouse supervisors working 40 hours/week
Each earns $25/hour plus $10/hour in benefits
Monthly indirect labor cost:

= 2 × ($25 + $10) × 160 hours

= 2 × $35 × 160 = $11,200

This figure would be added to your manufacturing overhead or administrative expense category.

Where Indirect Labor Appears in Financial Statements

Depending on your business type, indirect labor is recorded in one of the following:

Cost of Goods Manufactured (COGM) as part of manufacturing overhead
Operating Expenses in the income statement for service businesses
SG&A (Selling, General & Administrative) for corporate office roles

Proper categorization ensures compliance with GAAP (Generally Accepted Accounting Principles) and helps investors assess operational efficiency.

Reducing and Managing Indirect Labor Costs

Managing indirect labor is vital for increasing profitability. Here’s how:

Use Time-Tracking Software

Accurately record support staff hours and tasks for better accountability.

Automate Repetitive Tasks

Use tools like payroll software, HR systems, and maintenance alerts to reduce manual workload.

Outsource When Appropriate

Contract third-party providers for tasks like janitorial services, IT support, or accounting.

Regularly Audit Staffing Needs

Avoid overstaffing support roles and reassign excess capacity to productive tasks.

Indirect Labor in Different Costing Methods

Understanding how indirect labor is treated under different costing systems is key for accountants:

Absorption Costing

All manufacturing costs—including indirect labor—are included in product cost and inventory value.

Variable Costing

Only direct costs are assigned to products; indirect labor is treated as a fixed period expense.

Both methods are useful in different scenarios—especially for internal vs. external financial reporting.

Conclusion

Though it doesn’t touch your product or service directly, indirect labor is essential to business operations and profitability. By understanding, tracking, and optimizing these costs, you can improve budgeting accuracy, streamline operations, and make smarter financial decisions.

Whether you run a manufacturing firm or a startup, knowing how indirect labor works will give you a financial edge and keep your bottom line healthy.

FAQs

1. What is considered indirect labor?

Indirect labor includes employees who support business operations but don’t directly produce goods or services, such as supervisors, janitors, HR, and administrative staff.