How to Calculate Labor Cost Percentage

by Soren Bagley; Updated September 26, 2017
Business meeting

Labor cost percentage is a financial term used to describe a business' labor costs relative to its overall revenue. Being able to calculate labor cost percentage is an important business skill. It allows you to determine how efficiently a business is operating. It also helps you make more informed decisions regarding potential human resources changes.

Step 1

Determine the business' annual labor cost. This is all the money that the business had to pay to its employees throughout the year in wages, including pensions, medical insurance, bonuses, and any other benefits.

Step 2

Determine the business' annual revenue. This is the amount of money that the business makes per year as a result of its operations. Annual revenue refers to a business' gross earnings; it reflects the amount of money that the business takes in before any taxes or other deductions have been made.

Step 3

Divide the business' annual labor cost by its annual revenue. For example, if the business paid $20,000 a year to its employees and it brought in $100,000 a year in sales you would divide $20,000 by $100,000 to get 0.2.

Step 4

Multiply the result from Step 3 by 100. The resulting number is the business' labor cost percentage. (In our example, 20 percent.)

Tips

  • Labor cost can also be expressed relative to total operating costs. To determine the percentage of labor cost relative to total operating cost, substitute total operating cost for annual revenue in the above steps.

About the Author

Soren Bagley recently graduated from the University of Toledo with a B.A. in English Literature. He has been a professional writer for two years and his work has appeared on a wide variety of internet web sites, including Associated Content.com and Ehow.com.

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