How to Calculate Direct Labor Cost

Many companies underestimate direct labor cost. The trick for calculating your direct labor cost is making sure you include everything that is a cost for your company in hiring and keeping an employee. This is not just how much you pay the person, but also how much having an employee impacts your insurance premiums, benefits costs, payroll tax contributions, etc.

Things You'll Need

• Financial reports
• Financial statement
• Spreadsheet software
• Accurate payroll records

Instructions

1. Calculate the total wages you pay your employees. This includes everyone from temporary help up to and including any salary the owner or president/CEO of the company is paid. All these wages are part of your direct labor cost.

2. Analyze the costs associated with your employees and their pension plan that you pay. Some companies do not match any money put into a pension plan, which keeps their costs at essentially zero. Meanwhile, others match a certain percentage that each employee contributes. If your company matches this percentage, it must be included in the pension costs as direct labor cost. Some companies even contribute to a pension plan for an employee without an employee contribution; once again, this is part of direct labor cost.

3. Calculate the company's health insurance costs per employee. Include any amount your company contributes to disability insurance for your employees. This includes both short- and long-term disability costs for your company that are paid by the employer. This should be totaled to get your entire health care costs as part of direct labor cost.

4. Add the total cost your company must pay in workers compensation premiums. This amount varies based on the total of your payroll and the company's rating, so it must be considered when determining direct labor costs.

5. Include the employer contribution for taxes that must be paid for each employee. This includes the employer's portion of federal and state taxes as well as FICA (Social Security and Medicare).

6. Add in any additional costs you have associated with hiring employees, such as advertising open positions or hiring a headhunter. If you attend job fairs, include the cost for that in your direct labor cost.

7. Combine all these category totals to come up with your total direct labor cost.

Tips & Warnings

• If you offer additional benefits, such as use of a company vacation property at the beach or referral bonuses, these also should be included in your direct labor cost.

• It is best to have an accountant look over your calculation of direct labor cost. Many companies leave several items out they could include. If you do not have an accountant on staff, consider hiring one from outside the company to assist with this report and your other financial reports.

Resources

• Read this Article in Spanish
• AccountingCoach.com: Direct Labor Costs