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'll find this entry on both the Direct Costs and Personnel pages, but you only need to use it in one of those locations.)
  • Regular labor (also known as indirect labor) or labor that's part of your overhead expenses 

This article will help you understand when to use each labor type.


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:

  • If you manufacture a product and you pay salaries to factory workers making the product, those salaries are considered direct labor.
  • If you own a restaurant, the chef who prepares the meals and the servers who deliver them to your customers are considered direct labor.
  • If your business offers a professional consultation service, such as a law office or a gym with personal trainers, that labor can be considered direct labor.

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 is simply any salary you pay that's part of your overhead expenses. Administrative and management employees are often regular labor - but be sure to consider the rule of thumb above for direct labor.

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

  • Direct labor affects the profit margin of your product or service 
  • Regular labor affects the profit margin of your company as a whole


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:


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:


If you'd also like to have this itemized list 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.


More on Personnel:

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