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.