Calculating Labor Burden and Profits: An Example

# Calculating Labor Burden and Profits: An Example

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If you’re struggling to understand and measure your Labor Burden and its effect on profit, these articles by Diane Gilson will teach you how to do it.

## Labor Burden & Profits – An Example

What do your employees really cost? Let’s look at an example

We’ll start with an employee (“Pat”), whose hourly compensation is \$17, or \$35,360 gross annual payroll. As Pat’s employer, you do your research and find out that Pat has a variety of additional annualized costs “attached” to this position.

## How much, in total, does it cost Pat to perform his job?

• \$3,005 for payroll taxes (based on 2.7% state unemployment on the first \$9,000, and no other state disability taxes)
• \$3,536 for workers’ compensation insurance (at \$10 per \$100)
• \$4,200 for health insurance (\$350 per month)
• \$1,060 for retirement benefits (3% of compensation)
• \$720 for cell, telephone and/or Internet costs (\$60 per month)
• \$150 in uniforms (e.g., 4 company shirts at \$25, 1 jacket at \$50) or for office workers an equivalent amount in coffee(!)
• \$6,000 in company vehicle usage (depreciation, gas and oil, maintenance, license, insurance, etc.), or for office workers an equivalent amount in equipment usage and maintenance. and office space
• \$300 in small tools and equipment usage (at \$25 per month) or for office workers an equivalent amount in office supplies
• \$708 estimated annual bonus (2% of wages)
• \$100 employer-paid snacks, meals, parties, entertainment
• \$250 in training fees, seminars, etc…

### How many hours is Pat actually available for work?

Pat is potentially available for 2,080 hours of company work (52 weeks/year x 40 hours/week).

Subtract Pat’s non-project paid time for the year: Labor burden – Time available

• 6 holidays
• 10 vacation days
• 6 sick or personal days
• 2 days of training seminars

This equals 24 days (192 hours), leaving 1,888 available working hours.

Subtract an estimated 2 hours per week from the 47 remaining work weeks for miscellaneous administrative meetings, timekeeping, general problem-solving or prep time and so forth (breaks are assigned to jobs or projects). This reduces the available production time by another 94 hours.

Total time available for production/project work: 1,794 hours

### The Final Results for Pat’s “Numbers”?

First, Pat’s additional Labor Burden Costs total just over \$20,000. This brings Pat’s annual cost to \$55,389.

Therefore Labor Burden Cost per Production Hour (or Fully-burdened Cost) to your company is \$30.87 per production/project hour (\$55,389 ÷ 1,794 hours) or \$0.51 per minute.

To compute Pat’s Labor Burden Rate (%) per Production (work) hour, subtract Pat’s hourly rate from his/her fully burdened cost (\$30.87 – \$17.00 = \$13.87) and divide the excess by the base hourly rate.

We see that our additional cost to have Pat “on the job”, when computed as a percentage, adds 82% to Pat’s base hourly rate.

The bottom line:
Pat is a truly costly and valuable asset whose time should be carefully assigned.
And his/her related costs (and resulting contribution) should be closely measured and monitored!

Related Articles: Part 1 | Part 2 | Part 3

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