When a company makes a sale, it has a cash inflow. However, with this cash inflow, the company must also incur cash outflows. These cash outflows include such as inventory cost and labor costs. A company can calculate the percent of a sale that goes toward labor costs. This shows how many cents in each dollar of sales goes to labor. This is important because if the percentage is too high, then the company will need to adjust its labor costs or the price of the product to increase profits.
Determine the company's labor costs for the period. This amount is on the company's income statement. For example a company has labor costs of $700.
Find the company's sales on the company's income statement. In the example, the company has $2,000 in sales.
Divide the labor costs by sales. In the example, $700 divided by $2,000 equals 0.35 or 35 percent.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.