What Is Unit Labor Cost?

Unit labor cost refers to the amount of personnel expenses to make one item of your product. Knowing your total cost per unit can help you plan your pricing, see how different sales levels affect your gross profits, understand how changes in sales volumes will affect your profit margins and determine if you need to make changes to your production methods. You may also hear the term “unit labor cost” used in macroeconomic discussions referring to productivity relative to an economy.


  1. A unit is a single item you produce, such as a widget if you are a manufacturer. You calculate unit labor costs based on how many units you produce during a specific period, such as a month, quarter or year. The labor cost to make your first widget would not be a realistic figure for accounting purposes, since that one unit would have to absorb the entire wages and benefits of every production employee. Dividing your labor costs among the 10,000 units you make each month gives you an accurate figure of how much it labor it takes you to make your product.


  1. Labor costs for manufacturing relate to the wages and benefits paid to workers directly involved in making your product. This does not include your office staff or sales team. Office staff expenses go into overhead expense calculations, while sales staff expenses might be broken out separately as cost of goods sold because the compensation of salespeople changes based on the number of units they sell.


  1. In its simplest form, your unit labor cost is your total number of units divided by your total labor expense for that period. If your manufacturing labor costs are $10,000 for one month and you make 10,000 units, you spend $1 in labor on each unit you make, giving you a unit labor cost of $1. Adding this cost to your manufacturing and overhead costs helps you determine your break-even point. For example, if you have manufacturing costs, which include expenses such as materials and energy, of $2,000 to make 10,000 units, your manufacturing cost is 20 cents per unit. If you have $15,000 worth of overhead expenses, which includes costs such as rent, phones, marketing and insurance, your overhead cost per unit is $1.50. Your total manufacturing, overhead and labor costs are $2.70 per unit.


  1. If you make more units, your unit labor costs decrease or increase, depending on how many more units you make. For example, if you decrease your production to 9,000 units, using your current employees to make those 9,000 without cutting their hours or pay, your unit labor cost rises to $1.11 per unit, even if your overall labor costs didn’t rise. If you add an extra 1,000 units without keeping your workers any longer or paying them any more, your 11,000 units cost you approximately 91 cents per unit to make. If that order for 1,000 more units requires you to add a shift or pay workers overtime, your labor expense might go from $10,000 to $12,000. Those 11,000 units would cost you approximately $1.09 per unit.