Labor Expense as a Percentage of COGS

Labor Expense as a Percentage of COGS

KPI Details

Labor Expense as a Percentage of COGS measures the labor cost incurred by the plant (wages, salaries, benefits, training, etc.) in relation to the cost of goods sold (COGS) incurred by the plant, or production facility, over the same period of time. Excessive labor costs can be a sign of slow cycle times, high rework rates, overstaffing of the production plant and sub-par production employee training and performance. While companies typically seek to streamline plant operations and reduce employee positions to decrease labor costs, great care should be taken when doing so as too many layoffs can have a negative impact on company morale.

KPI Definition

The labor-related expense (wages, salaries, benefits, training etc.) incurred divided by the total cost of goods sold (COGS) incurred by the company over the same period of time, as a percentage.

KPI Best Practices

• Forecast demand accurately to avoid overstaffing of the production function
• Employ part-time employees when possible to minimize benefits costs
• Implement continuous improvement programs such as Six Sigma to identify redundant work efforts

KPI Calculation Instructions Labor Expense as a Percentage of COGS?

Two values are used to calculate this KPI: (1) the labor-related expense incurred by the plant, and (2) the total cost of goods sold (COGS) incurred by the plant, or production facility, over the same period of time. Labor costs are defined as the sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. Only include labor costs directly associated with the production of products to be sold (wages for employees that produce a product such as workers on an assembly line) in the numerator. Do not include indirect (wages for employees that support labor such as maintenance personnel) costs in the numerator. In this calculation, COGS includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. Do not include indirect expenses such as distribution costs and sales force costs in the denominator.

KPI Formula :

(Labor Expense Incurred / Cost of Goods Sold) * 100