What are Labor Costs?

The term labor costs refer to the amount of money that a company spends on labor. The responsibility of calculating labor costs in a company falls on the financial and accounting departments. Companies split labor costs into four categories: direct labor costs, indirect labor costs, fixed labor costs, and variable labor costs. Each serves its purpose.

Direct labor costs refer to supply chain employees such as delivery drivers and manufacturers. It covers expenses like their salaries, benefits, and sick pay. If a company wanted to reduce its direct labor costs, it might consider reducing the number of staff on the floor or investing in automated machinery.

Indirect labor costs are costs not directly linked to production. For example, production administration or an HR manager’s salary falls under this section. While many of these expenses are necessary, there are ways to reduce them, such as using automation and streamlining processes.

The other two categories – fixed and variable labor costs – are the opposite of one another. Fixed labor costs are expenses that don’t change, whereas variable labor costs vary depending on different factors. For example, a contract worker would fall under a variable labor cost, as they won’t be working permanently.

For many companies, labor costs are the biggest ongoing expense. This is why businesses are always looking to reduce them. Some of the best ways companies can do so include hiring talented staff, reducing hours, and using automation.