Total labor cost definition

What is Total Labor Cost?

Total labor cost is the aggregate cost of the hours worked by all employees , plus all related payroll taxes and benefits. This amount is used in the budgeting of financial results for a business. Total labor cost is comprised of a number of line items, which include the following:

Direct labor cost . This is the wages paid to production employees, including their overtime hours worked.
Indirect labor cost . This is the wages and salaries paid to all other employees, including any overtime hours worked. These payments cover employees in all parts of a business other than production, including administration, materials management, marketing, and sales.
Payroll taxes . This is the employer-paid portion of payroll taxes, which includes Medicare, social security, and unemployment taxes.
Benefits . This is all other expenses incurred on behalf of employees, such as the employer-paid portions of medical insurance, life insurance, and dental insurance.

Example of Total Labor Cost

Argentine Corporation employs 50 workers who each earn $20 per hour and work 40 hours per week. The company's payroll also includes 15% in payroll taxes, $200 per employee per week in health insurance, and 5% in retirement contributions. The company’s total labor cost calculation for one week is as follows:

Wages: 50 employees × 40 hours × $20 = $40,000
Payroll Taxes (15% of wages): $40,000 × 0.15 = $6,000
Health Insurance: 50 × $200 = $10,000
Retirement Contributions (5% of wages): $40,000 × 0.05 = $2,000

Based on this information, the company’s total labor cost is as follows:

$40,000 + $6,000 + $10,000 + $2,000 = $58,000

Therefore, the company’s total labor cost for the week is $58,000, reflecting wages, payroll taxes, health insurance, and retirement contributions.