What is Total Labour Cost?
Total Labor Cost refers to the total expense incurred by a company for the workforce, which includes direct and indirect costs. Direct costs are related to the wages and salaries of employees directly involved in production, while indirect costs include expenses related to support roles like maintenance workers.
How to Calculate Total Labor Cost
The general formula is:
Total Labor Cost = (Labor Percentage * Total Sales )/ Average Hourly Rate of Labor
Where:
- Labor Percentage is the portion of sales attributed to labor costs.
- Total Sales is the revenue generated by the company.
- Average Hourly Rate of Labor is the average pay rate of employees involved in production.
Components of Total Labor Cost:
- Direct Labor Costs:
- Wages and salaries of employees involved directly in production.
- Bonuses and commissions tied to production output.
- Indirect Labor Costs:
- Wages for employees supporting production (e.g., maintenance, supervisors).
- Payroll taxes, insurance, and training costs.
By calculating and managing total labor costs, companies can better assess the efficiency of their workforce and ensure they are optimizing labor expenditure.
How HR teams use this term
HR teams usually use Total Labor Cost when they write policies, explain employee communication, review payroll or leave records, or keep employee data clean in an HRMS.
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