Direct Labour and Indirect Labour
Do you know that you can categorise your employees as direct and indirect labours? Direct labours only include the employees who are involved in the hands-on production of the company’s products and services. On the other hand, all other employees fall under the category of indirect labour. Business owners should know their differences from the perspective of accounting as these two types of labour require different treatment. Hence, if you are not familiar with this, why not consider hiring an accounting firm Johor Bahru? The experts will help you in the accounting tasks, and you will able to put more time and effort in the business transactions that may generate profit (Also see What is in a Profit and Loss Statement?) for your company.
As mentioned above, direct labour refers to the employees who are involved directly in the production process. This includes the workers who work on the operating machines and the assembly lines. Business owners should not include any supervisory or support staff like the maintenance and management personnel as the company’s direct labour.
The accounting treatment for both is different in such a way that the company should charge the cost for direct labour to all the products based on how many units it has manufactured in that reporting period. Conversely, it should assign the cost for indirect labour, especially for those labours that work in the factory, to a cost pool (Also see What is Meant by the Term “Cost Pool”?) that it has allocated to the units it has manufactured in that period.
When calculating the cost for direct labour, business owners should charge the cost based on the hours of labour it has used when producing the items. In the calculation of the cost for indirect labour for employees who work in the factory, they may use a few cost pools, and this depends on the level of sophistication of the allocation. Each cost pool has a different way of allocation. As an instance, the cost pool for maintenance costs can include the cost for labour, equipment and maintenance, and business owners can allocate it based on the number of hours the company has been using the machine.
Accounting for the cost of indirect labour for those who handle administrative tasks is a bit different from those for the workers who work in factories. The business owner should charge this cost to expense within the accounting (Also see The Importance of Cost Accounting) period where it incurred. It will not appear as an asset (Also see Procedures of Asset Impairment) in the company’s balance sheet.
The cost of direct labour should change as the types and quantities of products vary, as it is considered as something that is completely changeable. On the other hand, the probability for the cost of indirect labour to change according to the production is low. This is because this cost shows the overhead that the company needs to support its operations at any levels.