Definition:

Labor & Related Expense refers to the total cost incurred by a company for employing its workforce. This includes wages, salaries, benefits, payroll taxes, and other related costs associated with maintaining employees.

Examples:

Examples of Labor & Related Expense include salaries paid to employees, health insurance premiums, retirement plan contributions, bonuses, overtime pay, and employer-paid taxes like Social Security and Medicare.

Formula:

Labor & Related Expense = Wages + Salaries + Benefits + Payroll Taxes + Other Employee-Related Costs

How to use the metric:

This metric is used to assess the cost efficiency of a company's workforce. By analyzing labor expenses, businesses can determine if they are spending too much on labor relative to their revenue, and identify areas where they can optimize costs. It is also useful for budgeting and forecasting future labor needs.

Limitations:

Labor & Related Expense does not account for productivity or the quality of work performed by employees. High labor costs might be justified if they lead to higher productivity or revenue. Additionally, this metric can vary significantly across industries and regions, making it less useful for cross-industry comparisons.

Applies to:

This metric works best in industries with significant labor costs, such as manufacturing, retail, hospitality, and healthcare, where managing labor expenses is crucial for profitability.

Doesn't apply to:

Industries with minimal labor costs, such as highly automated sectors or those heavily reliant on technology, may find this metric less relevant. In such industries, capital expenses or technology costs might be more significant.

Summary:

Labor & Related Expense is a critical metric for understanding the total cost of employing a workforce. It helps businesses manage and optimize labor costs, though it should be considered alongside productivity and industry-specific factors.