written by | May 16, 2022

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Cost of Labour and Its Types: Explained

The cost of labour is among the biggest expenses that companies have to deal with. The only two expenses, mortgage and rent, are higher on the list. In fact, in the restaurant industry, the cost of labour can be 30% to 35% of the total revenues. That's a lot of money withdrawn from your business every year. Furthermore, labour costs are a significant factor in determining your primary cost. This includes costs of labour and costs of selling goods. It is an important metric to measure effectiveness.

What is the cost of labour? How can you calculate them? What can you do to streamline the management of your labour expenses so that you can expand your business? We'll be able to answer your questions and provide ways to cut the cost of labour so that you can maintain your company in the right direction to succeed.

Did you know?

If you don't properly evaluate and allocate the cost of labour, it may increase your product's production cost, which may further decrease your profit margin. If you try to increase the selling price, your competitors may beat you in the race. 

What Is Labour Cost?

The labour cost definition is when we divide the total cost into indirect and direct costs. Direct labour cost comprises benefits for employees, the cost of hourly wages, and all payroll taxes that the employer pays to employees who work in the production of goods or services. 

Indirect labour cost is the term used to describe employees who aren't active in the production or service. This includes marketing, human resources and accounting.

Types of Labour Cost

After knowing the labour cost meaning, let's understand its types:

Variable Labour

As the name suggests, variable labour costs differ depending on the output. Small companies most common form of variable labour is the hourly wage. Think about the stores you shop in and the restaurants where you eat. When the demand for these establishments grows or decreases, labour cost fluctuates similarly.

Fixed Labour

Fixed labour costs are the same regardless of fluctuations in the output of a business's production, according to the Small Business Administration (SBA). Employers and owners who earn the same salary, regardless of the number of hours they work, are obvious examples of this labour cost. 

One advantage of these labour costs is that owners of businesses can avoid the expense of overtime for supervisory and managerial employees. However, it's often difficult to reduce fixed costs of labour without sacrificing the efficiency or effectiveness of the business operation.

Also Read: A Guide to Labour Welfare Fund Contributions and Benefits

Direct Labour

Direct expenses are expenses which are a part of an item of cost. A good example can be the raw materials for making the product or software for controlling the quality of a service/product for consumers. Most direct expenses include direct/indirect materials and labour. As per the Financial Accounting Standards Board, we can classify variables and fix costs for labour as indirect or direct.

Direct labour is the term that describes everyone responsible for producing the products or services of a company. Examples of direct labour are manufacturing managers, drivers of delivery trucks, assembly line employees and quality control engineers.

How to Reduce the Cost of Labour?

Reducing the labour cost does not mean that you should pay employees less, and there are other ways to cut down on one of the highest costs for your company. Here are some suggestions to help you take control of your labour costs.

Plan Your Schedule a Month in Advance

Scheduling ahead of time is among the best methods to cut down your costs for labour in the long run. We suggest establishing your employees' schedules at least one month ahead of time, and this allows you plenty of time to go through, adjust and improve the number of work hours. This way, you can cut down on the cost of labour while also taking care of every shift. This also allows your employees to locate substitutes for days when they can't work. So, you don't run out of staff.

Calculate the Labour Costs When You Plan Your Schedule

It is a difficult job. There are numerous moving parts: part-time vs full-time, who can work when, overtime, pay rates, etc. It's easy to lose track of the numbers. Additionally, it's the case that when you've got an effective schedule, there will be a problem that you need to change in one or more elements. When you change one of the variables, all different calculations and variables will also alter.

It is possible to avoid calculating all your numbers each time you alter the schedule by adding the labour costs as you plan. Software for scheduling like sling lets you know the cost of labour in real-time. This software takes away the hassle of making your labour expense report each month, making scheduling a breeze process.

Include a Rotating Shift

Rotating shifts are a type of scheduling that allows employees to move through a sequence of work during the day/night shift and any other swing shifts that might be necessary.

The rotation schedule could include the first, second, or third shift in some companies. The rotating schedule could include open shifts, lunch shifts, and closing shifts for dinner in restaurants.

It doesn't matter what they refer to, and the idea remains the same. For one week, team A works on the opening shift, while team B is on during lunch, and team C performs in the final shift. The next week, team A works during lunch, while team B will work on the dinner shift, and team C will work the first shift. This inclusion of a rotating shift into your schedule has many advantages:

  • Using the most experienced and senior employees during each shift implies an individual set of hours isn't weaker in terms of performance than the other.
  • A shift rotation allows you to teach your employees all without cutting into high-income hours when your company is at its busiest.

Train Employees to Fill-In for Other Positions

The ability to train your employees to be competent in their job is vital to success in your company. Making them competent in other jobs, in addition, helps reduce your stress levels and keeps the costs to a minimum.

For example, suppose that you have two people who can work, employees A and B. Employee A is sick and cannot work on Thursdays. However, employee B is incredibly close to working overtime. To keep the labour costs to the minimum, bring a part-time employee rather than burden extra work hours on employee B. Once you train employee C as a hostess, you can schedule her to fill in the hours of employees A and B. Also, communication skills are the most important to master in terms of training employees. 

Check the Hours of Overtime

The monitoring of overtime hours is a crucial way to ensure that you keep your costs at a low. If you don't keep track of overtime hours, the hours could quickly become the highest cost to your budget, which can impact the bottom line to the worst.

It is essential to make sure your employees' work hours are as low as possible to ensure they aren't out of hand. The best method for doing this is to use software such as sling. The sling allows you to see all hours worked according to your schedule and sends reminders when employees' time is over the overtime limit.

Also Read: Know About GST On Labour Charges In India

Establish Clock-in Regulations

Another method to keep costs for labour at a minimum is to create and enforce clock-in regulations and rules. A similar regulation must state that the employee's shift will start when they have been scheduled (e.g. 10:00 a.m.) instead of when they check-in (e.g. 9.45 a.m.). It may not sound like a lot, but it could result in significant overtime hours over two weeks. Of course, employees can be allowed to start their day early and are paid for the time. However, they must have permission from you first.

Reduce Absenteeism

Everybody has an emergency that leads to absences at one point or another time. If you don't maintain any strictness on this, employees may develop absenteeism as a bad habit, affecting company culture, employee engagement and labour costs. 

Conclusion

The cost of labour is simply the amount paid by the employer to his employees and includes salaries paid, tax on payroll, wages and benefits employers provide. This helps the management of an organisation in negotiations with unions, control of cost outsourcing, outsourcing and more. 
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FAQs

Q: What is labour cost?

Ans:

It represents the entire expenditure incurred by employers for the employees' employment.

Q: What are a few labour cost examples?

Ans:

A good assurance inspector's hourly salary includes short-term disability and healthcare advantages. Another example is an air hostess doing extra hour shifts.

Q: What are various types of labour costs?

Ans:

The four types of labour costs include fixed, variable, indirect and direct labour.

Q: How much is the GST for labour charges?

Ans:

It can be between 15% to 40% of the entire contract value.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.