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Labor Cost Calculator

Table of contents

What are labor costs?Direct and indirect labor costsHow to calculate labor costFAQs

Employ the labor cost calculator to estimate the actual hourly labor cost of an employee. Read further to get an insight into what labor costs are and how to calculate labor cost with a step by step procedure including the related labor cost formulas. After reading you will be able to better answer "How much does an employee cost?"

You may also check some other calculators created for different types of costs. For example, our meeting cost calculator can help you estimate the cost of a business meeting, or the opportunity cost calculator gives you insight into the vital concept of the opportunity cost.

What are labor costs?

If you were running a business and reached a point where you were considering hiring someone, or you already have an employee, one of the first questions comes to your mind was probably "How much does an employee cost?" So what is labor cost? Labor cost is the sum of all wages paid to employees which include not only remunerations for the actual work but also cover other expenses such as the cost of employee benefits and payroll taxes paid by an employer. The following list includes the most common additional expenses, which can all be part of the labor cost:

  • Payroll taxes;
  • Overtime;
  • Health care;
  • Bonuses;
  • Sick days;
  • Vacation days;
  • Insurance;
  • Benefits;
  • Meals;
  • Supplies; and
  • Training costs.

Direct and indirect labor costs

We can classify labor costs into direct and indirect (overhead) costs. How to calculate direct labor cost? It's straightforward: the direct labor cost formula consists of all wages paid for employees directly involved in production. In contrast, wages related to support labor and production, such as employees who maintain the factory equipment, are indirect costs.

Besides, labor costs can be fixed costs or variable costs. For example, the labor cost related to operating machinery that depends on the factory's output is a variable cost. On the other hand, fixed labor costs cover employees' labor, mostly with long-term contracts that don't depend much on production.

How to calculate labor cost

Our labor cost calculator applies the below procedure explained through an example for a hypothetical restaurant.

1. Compute gross pay.

If your employees work full-time, they will typically work 40 hours per week. By multiplying the average number of weeks in a year, you will get the related gross hours per year (40 × 52 = 2,080 hours). Let's say this employee earns 10 dollars per hour. Then the gross pay is equal to 2,080 × 10 = 20,800 dollars per year.

Gross hours per year = Gross hours per week × 52.

Gross pay = Pay rate × Gross hours

2. Estimate the net hours worked in a year.

To estimate the actual number of hours worked in a year, you need to know how many days an employee is absent in a year. If you would like to apply the labor cost calculation on a future employee, you can take the current staff's average number. For example, suppose a typical employee is absent 15 days a year due to a holiday or illness. In that case, you can get the yearly days of absence quickly by multiplying by the daily working hours (or weekly hours divided by working days), which is in the present example:

Hours not worked = 15 × 8 = 120.

Then subtract it from the gross hours:

Net hours worked = Gross hours – Hours not worked = 2,080 - 120 = 1,960.

3. Sum additional annual costs.

As we stated at the beginning, to get the real labor cost, you need to include all related expenses related to employment.

Other annual costs = Taxes + Insurance + Benefits + Overtime + Supplies

4. Compute annual payroll labor cost.

After computing all the above components, we finally arrive at the main labor cost formula, which tells us how much an employee costs in a year:

Annual payroll labor cost = Gross pay + Other annual costs

Let's say the additional costs are 3,900 dollars per year. To get the annual labor cost, you need to add this to the Gross pay, which was 20,800 dollars: 20,800 + 3,900 = 24,700.

5. Estimate actual hourly labor cost.

You can also estimate the actual hourly labor cost by dividing the Annual payroll labor cost by the worked hours.

Actual hourly labor cost = Annual payroll labor cost / Net hours worked

So how much does labor cost per hour in our example? Recall that the net hours worked in a year was 1,960 hours. Dividing the 24,700 dollars payroll cost by the new hours worked, we get a 12.60 dollars actual hourly labor cost.

6. Approximate labor cost percentage.

For a better insight into how much an employee costs, you can also check the labor cost percentage, which is the relationship between your labor cost and your total revenue over a period. So how to calculate the labor cost percentage? Just apply the following labor cost percentage formula to get the answer.

Labor cost percentage = Annual payroll labor cost / Total revenue

If our hypothetical restaurant's revenue is, let's say, 80,000 dollars in a year, the Labor cost percentage is 24,700 / 80,000 = 30.9 %.

Note that the acceptable labor cost percentages are around 25 and 40 percent for a restaurant. The ratio varies by industry, however. For example, businesses in the service sector might expect the ratio to be 50 percent or more, but the figure may be under 30 percent in the manufacturing sector.


How to reduce labor costs?

To reduce labor costs:

  • Avoid overtime;
  • Reduce employee turnover rate;
  • Offer commissions instead of a high base salary; and
  • Consider automatization.

The best methods to lower labor costs may vary from business to business, so it's best to seek advice from a financial advisor.

Is labor a fixed or variable cost?

The labor cost can be either variable or fixed. It depends on various factors and components inside the labor cost. Certain elements, such as the base salary, are classified as fixed costs, while others, such as commissions, are variable costs.

What is a good labor cost percentage for a restaurant?

Between 25% and 40% of gross revenue, depending on the type of restaurant. Self-service fast foods generally have a lower labor cost percentage, while fine-dining restaurants tend to have a higher percentage because they need to hire more staff to cater to their customers' needs effectively.

What is the labor cost to install vinyl plank flooring?

Installing vinyl flooring usually costs between $2 and $7 per square foot. The labor prices vary based on factors like the type of vinyl, dimensions, and installation method. It's a good idea to contact local flooring installation companies and gather multiple quotes for comparison.

How do I calculate labor cost per meal?

To calculate the labor cost per meal:

  1. Calculate the total labor cost by adding the wages of all employees involved in preparing the meals.
  2. Count the total number of meals prepared.
  3. Divide the total labor cost by the number of meals.

The result is the labor cost per meal.

Gross pay

Net hours worked

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