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.
Related Terms§
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§
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§
Thank you for taking this educational journey into the realm of accounting and labour costs! Continue developing your financial acumen for a prosperous career!
