Definition: An indirect labor cost is a labor cost that can’t be traced back to a specific product being produced. Indirect labor costs might help the company produce products, but they don’t actually produce products themselves. The most common example of indirect labor costs is when one non-production employee is paid to help a production employee. Let’s look at an example.
Direct labor costs consist of work done on specific products. For example, an assembly line worker who fabricates car fenders and then bolts them onto car chassis would be considered a direct labor cost. This employee’s work and pay can be associated with a specific product that is being produced.
What Does Indirect Labor Cost Mean?
Indirect labor costs can’t be traced back to specific product. If a janitor cleans the work area for the assembly line worker mentioned above, the janitor’s work doesn’t really make a product. It also can’t be traced back to a product.
The janitor helps the company produce products, but his work is not associated with any products. That is why the janitor’s pay is considered an indirect labor cost. It indirectly helps the company produce products.