{"id":38341,"date":"2021-02-16T14:48:13","date_gmt":"2021-02-16T12:48:13","guid":{"rendered":"https:\/\/factorialhr.com\/blog\/?p=38341"},"modified":"2023-08-16T14:44:17","modified_gmt":"2023-08-16T12:44:17","slug":"labor-costs","status":"publish","type":"post","link":"https:\/\/preproduction.factorialhr.com\/blog\/labor-costs\/","title":{"rendered":"How HR Can Leverage Labor Costs to Make Big, Exciting Changes"},"content":{"rendered":"

What does a great workforce cost?<\/strong> Smart businesses invest heavily in their human capital<\/a> by offering employees fair compensation, benefits, and training opportunities. While businesses are usually aware of how much they are paying in payroll and taxes, many do not take the extra step to see where their labor costs are really paying off.<\/p>\n

Businesses typically prioritize keeping costs low. But what if those low costs are also keeping employees unhappy and productivity down? Increasing costs or shifting them \u2014 whether by raising salaries, offering perks, or investing in other employee engagement initiatives \u2014 can end up saving the business money in the long run.<\/strong> Higher wages (or similar investments) may boost employee satisfaction, increasing productivity and efficiency. They will also improve retention, allowing the business to save big on recruiting, hiring, and training new employees. However, some investments are not worth it for employers. These drain the bank without having a significant effect on employee morale or output.<\/p>\n

It is vital that HR teams understand where the business is making these trades. What are the true labor costs of your business? How can they be optimized for the highest ROI? In this post, we\u2019ll cover how HR can tackle labor costs.<\/p>\n

Cost of labor definition<\/a>
\nFactors in labor costs<\/a>
\nShift in perspective: What costs do employees face?<\/a>
\nHow HR can leverage labor cost data<\/a>
\nMake data-driven decisions<\/a>
\nHR Analytics Software \u2705<\/a>
\n<\/p>\n

<\/a>\u00a0What Is the Cost of Labor?<\/h2>\n

Workforce compensation is usually among the biggest expenses at any business. That\u2019s why there is so much pressure for HR to drive top-line performance while managing costs. Does paying people more or giving them more benefits translate into better performance and outcomes? Figuring out the perfect recipe will have a huge impact on a business\u2019s success.<\/p>\n

But what is the cost of labor? How can we calculate it? In short, the cost of labor is the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by the employer.<\/strong><\/p>\n

The cost of labor can be broken into direct and indirect costs. Direct costs include wages for the employees physically making a product<\/strong>, like workers on an assembly line. Direct labor costs are variable because they rise and fall with production costs. Indirect costs are those not associated with production<\/strong>, such as a salesman who sells the new product. These costs can be variable or invariable.<\/p>\n

While it\u2019s standard for larger businesses, even small or medium-sized businesses can benefit from tracking variable and invariable labor costs. Properly managing costs will provide insight into the financial health of the business and help chart a path forward.<\/p>\n

<\/a>\u00a0Understanding Labor Costs<\/strong><\/h2>\n

When setting the price of a product, businesses must take into account the costs of labor, material, and overhead. The sales price must include all the costs involved in production. If any costs are left out of the sales price calculation, the profit will be lower than expected.<\/p>\n

While this type of number crunching has traditionally been the domain of the finance department, HR departments are being called into play. As the team responsible for managing human capital, HR is uniquely equipped to evaluate how labor costs are paying off.\u00a0<\/strong> When looking at the labor costs of their organization, HR needs to consider the following factors:<\/p>\n

Salaries and Wages<\/strong><\/h3>\n

This is the bread and butter of labor costs. Wages can be variable, as they are calculated based on the number of hours each employee works during a pay period. Salaries, meanwhile, generally remain constant, as they don\u2019t shift until the employee receives raise. Some businesses may pay salaried employees additional compensation for overtime hours while businesses with overtime exempt employees may not<\/a>.<\/p>\n

Regardless of whether your employees earn salaries or wages, time tracking software is a must for calculating labor costs<\/a>. By tracking employee working hours, HR can gain insight into how earnings are influencing employee productivity and behavior.
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