How to calculate labor cost percentage
Labor cost percentage is a financial term used to describe a business' labour costs relative to its overall revenue. Being able to calculate labour cost percentage is an important business skill. It allows you to determine how efficiently a business is operating.
It also helps you make more informed decisions regarding potential human resources changes.
Determine the business' annual labour cost. This is all the money that the business had to pay to its employees throughout the year in wages, including pensions, medical insurance, bonuses, and any other benefits.
Determine the business' annual revenue. This is the amount of money that the business makes per year as a result of its operations. Annual revenue refers to a business' gross earnings; it reflects the amount of money that the business takes in before any taxes or other deductions have been made.
Divide the business' annual labour cost by its annual revenue. For example, if the business paid £13,000 a year to its employees and it brought in £65,000 a year in sales you would divide £13,000 by £65,000 to get 0.2.
Multiply the result from Step 3 by 100. The resulting number is the business' labour cost percentage. (In our example, 20 per cent.)
- Labor cost can also be expressed relative to total operating costs. To determine the percentage of labour cost relative to total operating cost, substitute total operating cost for annual revenue in the above steps.