Labor costs, also called personnel costs or cost of labor, are all the expenses you have related to your employees
Labor costs include salaries, employee benefits, and payroll taxes—in short, all the costs you have as an employer.
The total cost of having an employee extends beyond the employee’s wage, and you have to take indirect costs into account, and budget with them, before you decide to hire someone.
Examples of costs that you might not immediately think of when looking to hire someone are the costs of social events, Christmas gifts, employer contributions, and sick leave.
Different types of costs
Labor costs can be separated into four broad categories, direct, indirect, fixed and variable. It’s important that you understand all four types.
Many companies use payroll software to automate the process of calculating costs.
Direct and indirect labor costs
Direct costs is the money that you spend to hire and retain employees that are directly involved in producing goods or delivering services for your company.
Examples include manufacturers, delivery drivers or craftsmen. For example, if you run a plumbing company, the costs associated with having plumbers that can provide services to clients are direct costs.
Indirect labor costs are related to employees who are not essential to produce goods or deliver services. This includes for example PAs, receptionists, supervisors, and internal accountants and auditors.
Fixed and variable labor costs
Fixed labor costs are costs that don’t vary a lot, and that you can be quite certain of when you budget, for example, a manufacturer’s annual salary. Variable labor costs, like variable costs in general, increase or decrease as your sales and production increases or decreases.
Examples include, the rate of an hourly employee or a temporary worker, or the cost of hiring a contractor to oversee a project.