Labor Cost

Definition; Labor cost is the monetary value of labor used in producing a unit of a product. The labor cost incurred may be through hiring of laborers who may be either;

  • Skilled
  • Semi-skilled or
  • Unskilled

The Key Measurement Indicator (KMI) commonly used in the labor market is labor rate per useful labor hours or piece rate which is based on the number of units a laborer is able to produce

If the Key Measurement Indicator used is labor hours consumed in production, then the labor rate is used to calculate the total labor cost. On the other hand, if the Key Measurement Indicator used is number of pieces produced at the end of the day, then piece rate is used.

Example one

Using labor hours

Solid Foundation company is a manufacturing firm which specializes in producing product Zee. The number of labor hours needed to produce one unit of Zee is 2 hours. Labor rate per hour is $3.5/hour

Therefore, labor cost to be incurred to produce one unit of Zee is;

2*3.5=$7.00

Example two

Using number of pieces produced

Let us assume the same example of Solid Foundation Company which is a manufacturing firm which specializes in producing product Zee. If the basis of paying labor force used in production of Zee is on piece rate. Then if the rate per piece is $4 per piece. Then the labor cost to be incurred to produce one unit of Zee is;

1*$4 =$4.00

Conclusion; You can see it is cheaper to use piece rate method than the labor hour rate in this case above. This may not be the case in other scenarios.