Manufacturing companies rely on their factory labor to produce items to sell to customers. Factory labor refers to all employees working inside the factory facility, or the manufacturing site. Some employees work directly on the production line while others work in support functions or in a management role. The company accountant records the labor in the financial records for all employees in the factory. Factory labor accounting includes payroll accounting and product costing. Factory labor accounting considers both direct and indirect labor.
The company accountant records the payroll transactions for all employees working in the factory. She enters the hours worked and vacation time taken for all factory employees into the payroll system. She also updates any deductions for these employees. At the end of the payroll period, she records the labor expense into the financial records. The factory payroll includes paying direct labor employees, hourly indirect employees and factory management employees.
Direct labor employees work directly on the production line. These employees convert the raw materials into a salable product. Direct labor represents an expense to the company. Direct labor can be traced directly to the products the company manufactures. The company accountant records the wages of direct labor employees in the financial records as product costs.
Indirect labor employees work throughout the factory. They provide support functions, planning functions and management. These employees include forklift drivers, production schedulers and supervisors. The labor costs for each of these employees contribute to the overhead costs. The company accountant records these labor expenses into the financial records as indirect wages, an overhead expense.
Product costing includes both direct labor and indirect labor costs. Direct labor contributes to the cost of the product through the accountant’s labor entry. When she records the direct labor expense, it transfers into the direct labor of the product cost. Indirect labor contributes to the cost as an overhead expense. The accountant divides the total overhead expenses into all products produced.