The A-Zs of Hiring Glossary

Indirect Labor Costs

What Are Indirect Labor Costs?

Indirect labor costs refer to the expenses associated with employees who are not directly involved in the production process of a product or service. These costs are not directly traceable to a specific product or service, but are necessary for the overall operation of a business.

Examples of indirect labor costs include salaries and wages of employees in administrative, support, and management roles, as well as benefits, insurance, and training expenses.

Indirect labor costs are important to consider when calculating the total cost of a product or service, as they can significantly impact a company’s profitability. It is essential to accurately track and allocate these costs to ensure that they are properly accounted for and do not negatively impact the bottom line.

Why do indirect labor costs matter in business?

Indirect labor costs refer to the expenses associated with employees who are not directly involved in the production process, such as supervisors, maintenance personnel, and support staff. These costs can have a significant impact on a company’s bottom line, as they can add up quickly and eat into profits. It’s important for businesses to closely monitor and manage their indirect labor costs to ensure they are not negatively impacting the company’s financial health.

How can businesses reduce their indirect labor costs?

One way to reduce indirect labor costs is to automate certain tasks that are currently being performed by human employees. This can help to streamline processes and reduce the need for additional staff. Another approach is to outsource certain functions, such as payroll or IT support, to third-party providers who can provide these services more efficiently and at a lower cost. Additionally, companies can implement performance metrics and incentives to encourage employees to work more efficiently and effectively, which can help to reduce indirect labor costs over time.

Dos And Donts of Indirect Labor Costs


  • Do allocate indirect labor costs to the appropriate department or cost center.
  • Do keep accurate records of indirect labor costs.
  • Do regularly review and analyze indirect labor costs to identify opportunities for improvement.


  • Don’t overlook indirect labor costs when calculating the total cost of a product or service.
  • Don’t use a one-size-fits-all approach when allocating indirect labor costs.
  • Don’t ignore indirect labor costs that may be hidden or difficult to track.
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