Knowing what labor cost is and how to calculate labor cost is essential if you are looking for a profitable business. Whether you are operating a business or an employee, you have heard about the term labor cost while filing tax or filing information using a pay stub generator to create a stub. The term labor cost is a financial term used interchangeably with “cost of labor” on financial reports.
Even though you hear and know the term, it still creates chaos every year. Whether you are HR, finance, accounting, or executive leader- you need to have in-depth knowledge about labor costs and how it can impact you and your company.
What Is Labor Cost?
In simple terms, labor cost is the amount or cost to be paid by employers to employees or workers to cover wages and benefits, plus related payroll taxes and the benefits. The labor cost is further divided into direct and indirect costs. The numerous factors make it complex to generate a stub, and therefore, it is advised to fill in the details carefully while you generate a stub using the paystub maker tool.
Direct costs: direct labor cost is the cost, which can be assigned or dedicated, specifically and consistently to employees who are associated with manufacturing a product, a particular work order, or provision of service.
Indirect costs: as the name suggests, indirect cost is not directly accountable to a cost object. Indirect costs are related to support labor. It can include administrator, personnel, and security costs. In a nutshell, to employees who maintain manufacturing equipment.
Is Labor Cost Fixed?
Again, labor cost is calculated, depending on either, fixed labor cost or variable labor cost. Here’s a comparison between the two.
Fixed Labor Cost
Fixed as suggested, don’t keep changing. Fixed labor costs are unlikely to change at a certain period of time. Let’s say fixed labor cost is the annual salary of an essential production worker. While all the employees will receive a fixed salary in a given year. They might have an increase in pay, but they will have a fair idea about when and how the increment can happen.
Variable Labor Cost
Variable labor cost is real with the production. The cost increases with the increase in production, and vice-versa. For example, a variable labor cost is the rate of an hourly employee. The method works best in the peak season or holiday season. The companies will directly hire an hourly employee to fill the production demand. Examples of such include restaurants, manufacturing companies, and retailers.
Why Calculate Labor?
Now that you understand the significant factors involved in labor, you must be wondering the reason behind doing complex calculations. So take it like this- will you sign your new office space contract without doing the maths? Meaning, will you not calculate monthly rent, electricity bills and other expenses beforehand to assure if it is the right deal or not?
So, why not before you hire employees fully assess whether the hiring will benefit you or outweigh the financial cost?
Calculating labor costs will sound more imperative once the company starts growing. With growth, companies overestimate staffing needs and start underestimating labor costs. This situation, in the end, will hurt everyone and in the worst-case scenario, result in laying people off.
Here are some benefits of calculating labor costs
Knowing the numbers and dollars will be highly profitable for your organization. Here is how:
- It will help you optimize price, which will maximize profit
- It will help you set the right prices and control the overstaffing and understaffing situation
- Prices that can compete in the market
You can also use an online paystub maker to generate stubs quickly and easily.
How To Calculate Labor Cost?
Here are six categories of expenses that you will likely need to factor in while calculating labor costs.
- Employment taxes
- Additional costs to consider
Formula to Calculate Labor Cost
Now that you know all the factors contributing to labor costs, you are all set to know the formula.
Labor cost p/h = (gross pay + all other annual costs) / actual worked hours per annum.
Using this simple formula and considering the above factors, you can easily calculate labor costs. Also, you can use a paystub generator online with a calculator to avoid complex math.
Now that you have in-depth knowledge about labor costs, you can check how much your employee is costing per hour to ensure that you are on the right page. With numbers in hand, you can make better decisions for your company. Also, you can use an Online Paystub free paystub generator for stubs, as it only takes moments to generate.