Labour Efficiency

 

The costs of labour in your production cycle may be due to two factors.

Wage Increases

Has your salaries to casual staff increase between time periods?

Yes:  

Have you passed this cost along to your customers as an increase in price to compensate?

It will take a while for the price increase to reflect in the Gross Profit.  To check the impact, compare the Gross Margin% calculation from a period immediately before the increase with one after the increase has been fully implemented.

The second one should have gone up.  If you multiply the change by the number of such periods in the year, you should get an estimate of how much your profit will improve.

If not enough, you may not have increased your prices sufficiently to compensate for the labour cost increase.  Note that this is a crude estimate as other variable costs and your revenue may also have changed

 Yes: you may have a Labour Efficiency problem.  See below

No; Linking to learn more about increasing prices 

Falling Labour Efficiency

 

 

Typical categories are:

  • Non-permanent labour
  • Energy and other utilities
  • Raw materials, packaging, shipping and transport.

Example:
Calculate a ratio of a cost category e.g. labour to revenue.

Year 1:
Revenue = $1,000 and
Labour = $100

The ratio is Cost/Revenue:
$100/$1,000= 10%.

Year 2:
The Revenue and Labour figures give you a ratio of 20%.

  • The cost of labour as a component of Revenue has gone up.
  • You are putting more labour expense into the product.

Consider why labour has gone up:

  • A wage increase.
  • Less efficient labour, more is required to do the same amount of work.
  • A change in work methods or machinery which is using more labour.

When you have multiple possibilities like this, the 12Faces article 5 Why’s Problem Solving Technique can be useful to work out what happened.

 

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