Difference Between Direct and Indirect Labor Cost

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 03, 2023

Direct Labor

Direct labor is labor that can conveniently be identified or attributed wholly to a particular job, product, or process.

Direct labor is used directly in production work to convert raw materials into finished goods.

For example, it helps when altering the construction, composition, or condition of a product.

An important characteristic of direct labor is that it varies directly in relation to the volume of output.

Indirect Labor

Indirect labor is labor that cannot be conveniently identified or attributed wholly to a particular job, product, or process.

Indirect labor is used only indirectly in production work. That is to say, it represents ancillary work done in connection with the product manufactured.

Difference Between Direct and Indirect Labor

It is not possible to separate direct and indirect labor in a clear-cut way. The main reason why is that the difference is usually dependent on the nature of the industry.

For instance, labor in one industry may be classified as direct, while the same labor in another industry may be considered indirect.

In distinguishing between the two, however, a simple criterion can be applied:

Labor that can be identified—distinctly and conveniently—with a particular job is direct labor; otherwise, it is indirect labor

For example, the salary of a production inspector is conveniently and distinctly associated with a fixed point of production, and so it is classified as an item of direct labor.

However, if the same production inspector is asked to visit different production centers and also to supervise ancillary production, then this labor cost cannot be identified "easily" or "conveniently."

In this case, the wage is classified as an indirect labor cost.

The following are general examples of indirect labor:

  • Labor for production (e.g., wages paid to the checker, crane driver, foremen, cleaners, etc.)
  • Labor engaged in service departments (e.g., staff at the powerhouse, internal transport service, security, etc.)
  • Labor engaged in the maintenance department
  • Labor and staff engaged in the storage department

Difference Between Direct and Indirect Labor Cost FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.