What is the difference between direct labor and regular (indirect) labor?

Your personnel forecast accommodates two types of labor entries:

  • Direct labor, or labor that's considered part of the cost of your product or service. You can find links to this entry on both the Direct Costs and Personnel pages of your Forecast. 
  • Regular labor (also known as indirect labor) or labor that's part of your overhead expenses.

Understanding direct labor

Some employees' salaries may be what you incur to produce your product or service. These are considered direct labor employees. Here are a few examples:

  • In a manufacturing setting, factory workers who assemble your products are examples of direct labor. These employees are directly involved in creating the products. Their work is essential to the production process, making their wages a direct cost of manufacturing the goods.
  • In a restaurant, direct labor includes chefs who cook the food and servers who deliver it to the customers. Chefs are directly responsible for preparing the food, a core service of any restaurant. Servers deliver this food to customers, making their roles crucial to the service delivery process. Both positions are integral to the restaurant's operation and directly contribute to generating revenue.
  • In service-oriented businesses like law firms or fitness centers, professionals offering the service, such as lawyers or personal trainers, are considered direct labor. In businesses like law firms or fitness centers, the professionals who provide the core services (legal advice, personal training) are the primary reason customers choose the business. Their labor is directly tied to the service being sold, making it a direct labor cost.

If you're unsure whether an employee should be entered as direct labor, here's a good rule of thumb: if you had a spike in sales, would you need to increase this employee's hours (or hire more staff in this role) to meet the demand? If so, then the employee is most likely a direct labor employee.

Understanding regular labor

Regular labor typically refers to wages paid to employees who are not directly involved in producing or delivering the company's products or services. Instead, these employees fulfill administrative, managerial, or support roles. Examples include office staff, HR personnel, and upper management. Their salaries are considered overhead expenses because they contribute to the overall operation of the business rather than being tied directly to the production of specific goods or services.

Why are direct labor and regular separated in LivePlan?

The reason we separate direct labor from regular labor in your forecast is simple:

  • Direct labor costs are the wages paid to employees directly involved in manufacturing a product or providing a service. These costs are a key component of the cost of goods sold (COGS), which is the total expense directly tied to the production of the goods or services sold by a company.
  • Regular labor affects the profit margin of your company as a whole. These costs are part of the business's fixed overhead. They don't fluctuate directly with production volume or service delivery in the short term. Instead, they impact the company's overall profit margin. High regular labor costs can reduce the company's overall profitability, indicating that the business may need to increase efficiency, reduce overhead costs, or adjust pricing strategies.

Locating direct labor and regular labor in your financials

Your direct labor entries are calculated into the Direct Costs totals in your Profit and Loss statement. You can expand the lines in this table to see the salaries:

Direct

If you'd like an itemized list of your direct labor entries to appear in the downloaded copy of your plan, you can easily add an Appendix that includes that list in an expanded Profit & Loss. For details, see Adding more detail to the Profit and Loss statement.

Your regular labor entries will appear in the Operating Expenses section of your Profit and Loss statement within LivePlan:

regular 

If you'd also like this itemized list to appear in the printed version of the Profit & Loss, you can easily add an Appendix to your plan, including that. For details, see Adding more detail to the Profit and Loss statement.

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