Knowing what labor cost is and how to calculate labor cost is essential if you are looking for a profitable business. Whether you are operating a business or an employee, you have heard about the term labor cost while filing tax or filing information using freecheckstubs to create stub. The term labor cost is a financial term used interchangeably with “cost of labor”on financial reports.

Even though you hear and know the term, it still creates chaos every year. Whether you are HR, finance, accounting or executive leader- you need to have in-depth knowledge about labor cost and how it can impact you and your company.

What Is Labor Cost?

In simple terms, labor cost is the amount or cost to be paid by employers to employees or workers to cover wages and benefits, plus related payroll taxes and the benefits. The labor cost is further divided into: direct and indirect costs. The numerous factors make it complex to generate stub, and therefore, it is advised to fill the details carefully while you generate stub using paystub maker tool.

Direct costs: direct labor cost is the cost, which can be assigned or dedicated, specifically and consistently to employees who are associated with manufacturing a product, a particular work order, or provision of service.

Indirect costs: like the name suggests, indirect cost is not directly accountable to a cost object. Indirect costs are related to support labor. It can include administrator, personnel, security costs. In a nutshell, to employees who maintain manufacturing equipment.

Is Labor Cost Fixed?

Again, labor cost is calculated, depending on either, fixed labor cost or variable labor cost. Here’s a comparison between the two.

Fixed Labor Cost

Fixed as suggested, don’t keep changing. Fixed labor costs are unlikely to change at a certain period of time. Let’s say fixed labor cost is the annual salary of an essential production worker. While, all the employees will receive the fixed salary in a given year. They might have an increase in the pay, but they will have a fair idea about when and how the increment can happen.

Variable Labor Cost

Variable labor cost is relawith the production. The cost increases with the increase in production, and vise- versa. For example, a variable labor cost is the rate of an hourly employee. The method works best in peak season or holiday season. The companies will directly hire an hourly employee to fill the production demand. The examples of such include restaurants, manufacturing companies, and retailers.

Why Calculate Labor?

Now that you understand significant factors involved in labor, you must be wondering the reason behind doing complex calculations. So take it like this- will you sign your new office space contract without doing the maths? Meaning, will you not calculate monthly rent, electricity bills and other expenses beforehand to assure if it is the right deal or not?

So, why not before you hire employees you fully assess whether the hiring will benefit you or outweigh financial cost.

Calculating labor cost will sound more imperative once the company starts growing. With growth, companies overestimate staffing needs and start underestimating labor cost. This situation in the end, will hurt everyone and in the worst case scenario, result in laying people off.

Here are some benefits of calculating labor costs

Knowing the numbers and dollars will be highly profitable for your organization. Here is how:

  • It will help you optimize price, which will maximize profit
  • It will help you set the right prices and control overstaffing and understaffing situation
  • Prices that can compete in the market

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How To Calculate Labor Cost?

Here are six categories of expenses that you will likely need to factor while calculating labor cost.

  • Recruitment
  • Wages
  • Employment taxes
  • Training
  • Overhead
  • Additional costs to consider

Formula to Calculate Labor Cost

Now that you know all the factors contributing to labor cost, you are all set to know the formula.

Labor cost p/h = (gross pay + all other annual costs) / actual worked hours per annum.

Using this simple formula and considering the above factors, you can easily calculate labor cost. Also, you can use make paystub online with calculator to avoid complex math,.


Now that you have in-depht knowledge about labor cost, you can check how much your employee is costing per hour to ensure that you are at the right page. With numbers in hand, you can make better decisions for your company. Also, you can use an Online Paystub freecheckstubs generator for stubs, as it only takes moments to generate.