What is a Labor Cost Percentage?
Labor cost percentage is a calculation that shows how much of the total costs for a product or service are for labor. It's also known as "labor content," and it can be determined by dividing the total labor costs by the total production costs, or by multiplying the number of hours worked by the hourly wage, then dividing that amount by the total production costs. Labor cost percentage is most commonly used for analyzing manufacturing companies; however, it can also be applied to other industries. For example, an e-commerce site may use labor cost percentage to determine how much profit they're making on each item they sell.
The formula for calculating labor cost percentage is:
Labor Cost % = Labor Costs / Total Revenue
Labor costs include all expenses related to hiring, training, and managing employees. The total revenue generated by your business is everything you make from selling goods or services—including any fees you charge for services rendered.
For example, if you had $10,000 in labor costs for the month of May and $20,000 in total expenses for the month of May, then your labor cost percentage would be 50%. The second way to calculate your labor cost percentage is to take your total payroll expense (salaries and wages) and divide it by your total sales revenue. For example, if your company made $2 million in sales revenue during May 2019 but paid out $300,000 in salaries and wages during that same time period, then your labor cost percentage would be 15%.
Why are labor cost percentages important?
The labor cost percentage is an important indicator of the health of your business. It tells you the percentage of your expenses that are going to employee salaries and other benefits, and it's an important number to keep track of because it helps you understand how much money you're spending on employees and whether that amount is sustainable. It's also helpful for understanding how much money is going toward actual production, which is important because if you're spending too much on overhead costs, it could affect your ability to meet demand.
