How to Account for Labor

Labor costs can be the single biggest expense in a business, especially for a manufacturer.

Accounting for the costs of labor is at the heart of most business accounting since employee costs and related expenses are such an integral part of an operation. Controlling such expenses can add gain to a business' profit margin significantly. Even in simple organizations without extensive payroll programs, labor accounting can be determined quickly with a basic spreadsheet program.

Things You'll Need

• Personnel records
• Computer
• Spreadsheet program

Instructions

1. Identify each of the employees in an organization and their payroll costs. Access personnel records, if necessary, to obtain the information. Locate the records of their pay per month, benefit costs paid, and whether the person is paid hourly, by salary or by commission only.

2. Input the personnel costs for each employee into a spreadsheet via a computer with a spreadsheet program. Enter each employee's name in an initial column, then add three more columns. Label one column represent salary, the second column benefits, and the third column miscellaneous compensation. Input the pay data from the personnel records.

3. Determine the cost per employee and in aggregate for one month. Use the spreadsheet summation functions to determine these numbers. Check your formula math in the spreadsheet for any mistakes. Use the results of the data as your labor accounting cost for one month of operation.

4. Take your labor monthly cost and add it a spreadsheet for your businesses revenues and expenses. Put the labor cost in the expense side. Extrapolate your revenue and expenses for one month to twelve months. Check your math, and complete the process for a one-year projection of business costs.

Tips & Warnings

• For labor costs that can't be directly attributed to a particular function, you can always use an indirect cost rate to reasonably estimate labor expense to a work product.

• If you lump everyone by classification into a similar number, your labor accounting could be thrown off by generalizing too much. Particularly with hourly employees, overtime and odd work schedules in real-time can be inconsistent with your assumptions.

References

• Business Dictionary: Labor - Definition
• Accounting Coach: Direct Labor - Standard Cost and Variances
• Beef Magazine; "Accounting for Labor"; Tom Hogan; June 1998
• Accounting Coach: Payroll Accounting

Resources

• Basic College Accounting: Labor Costing Formulas