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?
Pat’s additional costs:
- $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…
Total additional costs: $20,029
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 estimate of 2 hours 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!
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