Calculate the true cost of labor on your assembly line

Businesses need to be aware of the costs involved in the manufacture of each component of their finished products. This includes the warehousing costs for each products, and also the labor required to actually make the goods, and also to ship them out. In order to estimate the costs of labor with a high degree of accuracy is to work out those costs based on throughout numbers.


What is throughput?

This refers to the rate at which goods are finished on a consistent basis. Throughput can be applied by different businesses in different ways, but the most common way it’s measured is by working out the average number of goods that are finished at the facility in a single day. Measuring the throughout in this way allows management to determine labor costs per unit manufactured.


There are natural caps on the amount of goods that can be produced in a single day. For example, a warehouse’s cap takes into account the amount of storage space available, and also the number of labor hours available each day in which goods can be moved around the warehouse. More employees can be hired, but each employee can only perform a certain amount of tasks each day. Therefore, the labor cost will be averaged as the sum of labor costs multiplied by the amount of time it takes for a product to be moved from production, through storage, and out to shipping.

Cost of labor

Businesses need to understand exactly what counts as labor costs, because they’re a huge factor in your throughput calculations. The cost of labor is comprised of not just the hourly wage paid to each worker, but also the benefits and any taxes the employer has to pay. For example, benefits might include compensation insurance, personal and sick leave, and your share of the worker’s insurance costs.

The calculations

Two calculations must be made to work out the labor expense for each product that’s finished at the facility. First, work out the rate of throughput by tracking the movement of goods through the warehouse. The number of items finished must be divided by the total amount of labor hours to arrive at the throughout time per item. Finally, multiply the throughput time by the average labor cost per hour to arrive at the labor costs per item finished.

This article was brought to you by the Norwegian packaging company ITO Gruppen. Palletering is Norwegian and means palletizing solutions, with more than 55 years of experience from the industry, we know the right solution for you.