How to calculate labor cost?
Labor cost is the sum of the expenses an employer must incur to pay its employees. It varies according to economic conditions, employee experience, industry and type of job.
Labor cost includes but is not limited to:
- Compensation for work completed, which can be broken down into hours worked (hourly cost) or calculated over an entire year (annual cost)
- Employees’ travel expenses and transportation
- Recruitment and professional training
- Other benefits (such as meals)
- Staff housing
- Work uniforms
The total is added to the cost of goods sold and then compared to total revenue to confirm profitability. Certain scheduling software lets you calculate labor cost directly.
Why is labor cost important?
The labor cost lets you evaluate the soundness of a company’s human resources management. An overly high labor cost can lead to decisions about hiring, offshoring or automating processes, for example.
What is labor?
Labor refers to the human capital required to produce products or provide services. Costs directly associated with product manufacturing include raw material receipt and storage, processing, assembly, and in some cases, delivery. Costs associated with services include intellectual or technical work, as well as intangible products and services.