In accounting, indirect labor is a category of indirect cost. It refers to labor costs incurred during a service or production process, but are not directly traceable to a cost object. Consider them overhead costs and treat them accordingly.
It is not always easy to distinguish between direct and indirect labor costs. Some labor costs may be incurred during the production process or while providing services, but still may be considered indirect because they are not readily applicable or not conveniently traceable.
Examples of indirect labor costs include, for example, the cost of an employee overseeing machines in an automated production process. The employee must oversee the machinery and equipment in the production process, but because the employee is not actually engaged in the production process the relevant labor costs are considered indirect labor costs and treated as such.
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When overtime wages are incurred by chance – it just so happens the employee working on the production process is working overtime – as opposed to by necessity – the job was a rush-job or a particularly strenuous job that required extra work – then the overtime wages may be considered overhead and treated accordingly.
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