Free Overhead Training - Lesson 2

Lesson 2 | Total your Indirect Labor Costs

Your Free Overhead Training from | Lesson 2

If you missed Lesson 1: “Separate out your expenses from your profit and loss statement” you can click here to access it or type the URL below into your internet browser:


We will be going over step 2 in this Lesson.

The five step process to calculate your overhead rate.

  1. Separate out your expenses from your profit and loss statement
  2. Total your Indirect Labor Costs
  3. Count your Direct Labor Employees
  4. Total your Direct Labor Hours
  5. Calculate your Overhead Rate

Lesson 2: Total your Indirect Labor Costs

Indirect Labor Definition: labor performed, as by maintenance and clerical workers, that is not considered in computing costs per unit of production.

Meaning indirect labor refers to all employees who spend time working on tasks, projects or roles in the business that is not tracked back to specific service, production units or products. In other words, it is any work that can’t be billed to customers, goods or products.

For example, if you are an Attorney, Doctor, Contractor, Retail store owner, Restaurant owner and had a Graphic Artist on staff for to design ads for you to bring in business for your company then this employee would be considered Indirect Labor.

However, if you own a Graphic Design company and this employee did the marketing for the company as well as for clients, then the time spent on marketing would be indirect labor costs and the time spent on projects that are billed to the client would be direct labor costs for this employee.

You will see employees at times, are split based on groups or divisions in a particular business and that time should be separated and the costs calculated to get an accurate accounting of all indirect labor costs.

Here are some examples of typical indirect labor positions:

Office managers
Administrative staff
Purchasing staff
Material handling staff (Such as warehouse employees)
Human resource staff
Marketing staff
Engineering staff

In most small business employees tend to wear several different hats and can cross from direct labor to indirect labor. You should try and calculate as close as possible the total amount of time spent as an indirect labor employee. Even if it is a small amount, because it will cause your calculation to be off and you will not have an accurate overhead rate when finished.

If the employee only works as an indirect employee, then all you need to do it calculate the total pay for that employee for the entire year.

Make sure you include your employee’s indirect labor burden as well.

BURDEN (according to Webster’s Dictionary)
Something that is carried: Load | Duty | Responsibility

When you are calculating your break-even rate, labor burden needs to be separated for direct labor employees, however we are not doing that calculation. When calculating your company’s overhead rate, indirect labor burden is not calculated separately.

Here are some example of indirect labor burden costs that will be needed in your calculation totals:

Employers Labor Taxes (The taxes your company has to pay on each employees)
Workers compensation
     Health Insurance (The portion that your company is responsible for)
     Retirement Plan
     Vacation Pay
     Sick Pay
     Holiday Pay
     Clothing (Any clothing that your company pays for each employee)

Once you have all of your indirect labor cost and burden costs calculated for each employee, you will need add all the costs together and the total is your total indirect labor costs for your business.


Congratulations you have completed the second step in calculating your overhead.

I recommend you do these calculations every month or at least every quarter for your company.


With calculating your Indirect Labor Costs is quick and painless and updating your information monthly can be done in minutes instead of hours. Give a try today by clicking the Get Started Now button below.



Thank you,
Mark Lallemand

P.S. Next we will go over Lesson 3 in calculating your company’s overhead so keep watching for the next Free Training email.



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