How Does a Labor Cost Calculator Work?

The Milestone Team December 13, 2022
labor_cost_calculator

Every small business owner wants to know how much it costs to have an employee be added to their payroll. A labor cost calculator is a tool built to answer that question. Knowing your cost of labor is essential for the proper pricing of your products and/or services. The calculator works by adding all direct and indirect labor costs to determine your cost of labor. 

How to Calculate the Labor Cost Formula.

The labor cost formula at its simplest is: 

Annual Labor Cost = Gross Pay + Annual Costs

However, annual costs is a very general term. The first three categories under annual costs are taxes, benefits, and insurance. Typically the gross pay only accounts for two-thirds of the actual cost of an employee. The majority of the other third lies in these three categories. A fourth category, supplies, is very variable, depending on the business. Individual supplies, such as a hard hat for a construction worker, should be included in annual costs.  

How to Calculate Labor Cost Per Hour?

Labor cost per hour is an easy addition to the labor cost formula. This formula works for a single employee or the whole business. The reason annual costs are still used is because many businesses make payments on an annual basis, not hourly, so it’s easier to calculate. The formula is:

Hourly Labor Cost = (Gross Pay + Annual Costs)/ Hours Worked

Many businesses may want to understand their seasonal labor costs, rather than annual labor costs. For example, retail stores may want to ensure their labor costs during the holiday season are on pace with their increased revenue. This formula would be:

Hourly Labor Cost = (Gross Pay During Season + Seasonal Costs)/ Hours Worked During Season

Seasonal costs would be the annual costs divided by the length of the season plus any additional seasonal costs. For example, a clothing store wants to know its holiday season labor costs from November through the end of December. The gross pay during that season is $500,000. During the year, they pay $1,200,000 in employee annual costs. They also pay an additional $50,000 for seasonal outfits and training for their staff. Their employees work 5000 hours during the holiday season. The calculation would look like this:

$1,200,000 x ⅙ (proportion of the year worked during this time = $200,000

$500,000 (Gross Pay) + $50,000 (extra seasonal costs) + $200,000 = $750,000

$750,000/ 5000 hours = $150/hour

How to Calculate Labor Cost Per Day

Average labor cost per day would be the same calculation as hourly labor cost, but divided by days instead of hours. Here is the formula:

Daily Labor Cost = (Gross Pay + Annual Costs)/ Days Worked

What Are Some Direct Labor Cost Examples?

Labor costs can be split into two categories, direct and indirect. Direct costs are those directly involved with producing and/or selling the good or service. A good example of this would be the wages of a mechanic in a car shop. An indirect labor cost revolves around support labor. Think of a security guard’s wages or the salary of someone who cleans factory equipment. 

What Is A Good Labor Cost Percentage?

Small business owners should be curious about their total cost of labor and goods in proportion to revenue. This is called their margin. Good margins are dependent on the industry. For example, restaurants and food trucks typically make around 3-5%. Anything above this is a really good margin. On the other hand, a liquor store makes between 20-30% margin on alcohol sales. Anywhere within this margin is a good percentage. 

How Milestone Can Help You Calculate Labor Costs.

Milestone’s team of experts specialize in back office data. We help put meaningful practices in place to track numbers for financials, HR, and payroll services. We can help give you a better picture of your business to make informed decisions. Reach out to our team today to get started. 

Related Content

What payroll company is best?

What Payroll Company Is The Best?

There are many excellent payroll service companies in the marketplace. They all offer different pros and cons, and the best ...

What are the names of payroll companies

What Are The Names Of Payroll Companies?

There are tons of popular payroll service companies, from ADP, to Gusto, to Rain. The best way to find a ...

What-are-2-different-types-of-payroll-systems

What Are The Different Types Of Payroll Systems?

The two different types of payroll systems are payroll processors and payroll softwares. A payroll processor is a system where ...

Stay in the know