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Indirect Labor Costs And Implications For Overhead Allocation

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  • Bea Chiang

Abstract

Cost accounting typically allocates indirect labor cost to cost object based on direct labor hours. The allocation process implicitly assumes that indirect labor costs vary proportionally with direct labor hours. The assumption of a linear relationship between indirect and direct labor is particularly suspicious at low production volume levels because there tends to be a fixed component in indirect labor. The linearity assumption is also challenged by recent increasing complexity of indirect labor tasks. As automation technology replaces some work of the of traditional labor, the cost of non-production workers becomes an important element of manufacturing overhead and it may not be related to labor hours in a simple linear manner. A model is derived to show the relationship between indirect labor overhead and direct labor hours under different conditions. The implication for the allocation of indirect labor overhead is also discussed.

Suggested Citation

  • Bea Chiang, 2013. "Indirect Labor Costs And Implications For Overhead Allocation," Accounting & Taxation, The Institute for Business and Finance Research, vol. 5(1), pages 85-96.
    • Handle: RePEc:ibf:acttax:v:5:y:2013:i:1:p:85-96
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    References listed on IDEAS

    as
    1. Gunasekaran, A. & Korukonda, A. R. & Virtanen, I. & Yli-Olli, P., 1994. "Improving productivity and quality in manufacturing organizations," International Journal of Production Economics, Elsevier, vol. 36(2), pages 169-183, September.
    2. Noreen, Eric & Noreen, Eric & Soderstrom, Naomi, 1994. "Are overhead costs strictly proportional to activity? : Evidence from hospital departments," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 255-278, January.
    3. Wacker, John G. & Yang, Chen-Lung & Sheu, Chwen, 2006. "Productivity of production labor, non-production labor, and capital: An international study," International Journal of Production Economics, Elsevier, vol. 103(2), pages 863-872, October.
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    More about this item

    Keywords

    Indirect Labor Cost; Labor Cost; Overhead Allocation; Cost Accounting; Indirect Labor Cost Allocation;
    All these keywords.

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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