# How To Calculate Labor Cost: A Step By Step Guide

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That number tells you that when you’ve factored in all the other employee expenses, you’re paying your employee \$22.80 per hour to produce widgets. This example only deals with one employee, but you can scale it up to accommodate as many employees as you have participating in manufacturing products or providing services. Stated again for clarity, this expense refers to salaries, wages, and benefits paid to workers directly involved in performing a service or manufacturing a product. With this integrated feature, you can set up a central terminal or allow your employees to clock in and out right from their mobile devices.

Once you have the total cost, the direct labor rate is calculated by dividing that dollar amount by the total hours of labor calculated earlier. Then, we need to determine the number of hours required to make a single product. We can calculate this figure by dividing the total number of products by the total number of direct labor hours needed. First, you need to determine the direct labor hourly rate by dividing the labor cost by the number of hours worked.

## Step 1. Determine Gross Wages

In a year, he is supposed to work 52 weeks, 40 hours each week, which comes to 2080 working hours. Another way to keep the cost in question low is to establish and enforce clock-in rules and regulations. What can you do to lower that cost and give your business more profits?

As you can have real-time insight into your employees’ working hours, you can rest assured that your data is exact and error-free. GPS time tracking apps, such as Timeero, can help you always have relevant and accurate data on your workforce attendance. When it comes to calculating overtime pay, your company needs to follow FLSA and state regulations, which can vary significantly from one state to another. So, now we can calculate that the actual number of Robert’s working hours last year was 1960.

## The Best Way To Manage Direct Labor Cost

Doing so will make it easier to work with, control, and, ultimately, reduce. In that case, it can cause the inappropriate cost of goods sold and, thus, harm profits. In this article, our experts at Sling discuss the ins and outs of this expense, show you how to calculate it, and give you tips for controlling it within your business. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.

1. You can find this by averaging together all the absences and illnesses of individuals who work in similar positions to the hypothetical employee in question.
2. Wages accounted for \$28.76, or 70.5 percent of costs, while benefits were \$12.02, or 29.5 percent.
3. This way, all your labor cost calculations will be accurate, and you can use them to manage your workforce further.

Of course, employees are allowed to clock in early for work — and get paid for that time — but only if they have your permission first. It’s also important to determine the net hours your employee works in one year. You can find this by averaging together all the absences and illnesses of individuals who work in similar positions to the hypothetical employee in question. That’s why we’re going to reduce the annual cost down to an hourly cost.

When we multiply the annual number of hours Robert is supposed to work with a gross hourly rate of \$13,75, we can set her gross yearly wage as \$28.600. Direct labor cost even includes monies paid to individuals for ancillary tasks not related to the “hands-on” manufacture of a product or the “face-to-face” provision of a service. The reality of the concept, though, goes well beyond just the hourly rate you pay your employees. This way, all your labor cost calculations will be accurate, and you can use them to manage your workforce further.

## Direct vs. Indirect Labor Costs

When calcluating direct labor rates and costs, it’s important to verify that the wages and costs used are directly related to a product’s creation or service provided. Indirect labor, like support roles, supervisors, quality control teams, and others without a direct contribution, should be excluded from your direct labor cost and rate calculation. And  If the actual direct labor cost per product is higher, the company spends more to produce one unit than is planned, which can be harmful.

## Calculate Hourly Direct Labor Cost

Think about your company’s expenses for everything we’ve mentioned above. Then, you’ll get closer to figuring out how to calculate labor costs. Only after factoring in all these additional expenses can you calculate the actual labor costs for your company. The result is the direct labor cost per hour for the production of that product or the delivery of that service.

Direct labor costs are defined as a cost of labor that goes directly into the production or manufacturing of a good. These include the wages, taxes, and benefits paid to the employees that directly worked on the product over a time period. Direct labor rates are the labor costs directly resulting in the production of a product or delivery of a service. These costs include wages as well as payroll taxes, insurance, retirement matches, and other benefit costs. If you’re wondering how much labor costs your company, keep in mind that labor cost isn’t only the hourly rate you pay your employee. How to calculate direct labor ratesThe first step to calculating the direct labor rate is to determine the total time spent on the production of a product or delivery of a service.

But, If you want to run a profitable business, you need to keep an eye on your labor costs and make sure they don’t get out of hand and harm your bottom line. As we can see, labor costs are one of the biggest challenges facing businesses today. They can eat up a large portion of your revenue and affect your bottom line. According to the US Department of Labor, in March 2023, the average cost of employee compensation for workers in the private industry was \$40.79 per working hour. Wages accounted for \$28.76, or 70.5 percent of costs, while benefits were \$12.02, or 29.5 percent.

Direct labor costs in different industriesIn a service environment, direct labor rates can be recorded directly on a per job basis. Lawyers, consultants, and others are often required to track their billable hours so that the direct labor cost can be passed directly to the customer. We can then calculate the labor cost per product by multiplying the direct labor hourly rate by the time needed to produce a single product. For example, if the hourly rate is \$17, and it takes 0.2 hours for a single product, the direct labor cost per product is \$3.4 (\$17 x 0.2).