Labour Costing

What’s it all about?

The techniques for measuring the Direct Labour part of your variable costs and some of the employment issues that affect us as accountants and business managers .

Staff Turnover

High staff turnover can be a cause for concern but there are many reasons why high staff turnover can be considered quite acceptable.

Some jobs are normally held for a short time only or by people (such as students) that only require jobs for  short period e.g. waiting staff in restaurants. I was an Army officer for three years as ayoung man on what was known as a Short Service Commission. they needed most of us to leave after three years (needed a high staff turnover) as there was only a requirement for about 1/3rd of the number at the next rank. If we hadn’t gone, they would have had a problem.

People may move on because they have been promoted which actually could reflect well on the department. If your department is training new staff and they never move on up or out, it might suggest your training wasn’t up to much.

People retire, so if the department employs a lot of older staff then they could easily have a higher staff turnover.

If the department has reduced its overall headcount (employs fewer people at the end of the year than at the beginning) then it will automatically show a high staff turnover. If this is expected, then it isn’t anything to be concerned about either.

We’ve discussed how the level of staff turnover you would worry about depends upon the industry you are in. Some (e.g. catering, fast food, shop work) expect high levels of turnover. Where you have invested in training staff or they are vital to your business or experience is important, then high turnover is more of an issue.

“A third of 2010’s new teachers have already quit profession”

Read more at:

Note the high turnover in teaching staff – 30% over 5 years. This isn’t all teaching staff, it’s just the cohort that joined in 2010. This isn’t staff turnover in the meaning of changing jobs, these people have left teaching completely.




Replacing an employee costs £30,000, report says

On average the cost to employers of replacing a single member of staff is more than £30,000, according to a recent report.

‘Startling’ costs

The analysis from Oxford Economics found that by far the greatest expense, more than £25,000, comes from loss of productivity caused by the time it takes – 28 weeks on average – for a new recruit to get up to speed.

The remaining costs arise from the logistics of finding a replacement, it said. This includes agency fees, advertising costs, HR and management time, and the possibility of hiring temps before the new role started.

The costs and issues surrounding staff retention.

The issues surrounding replacing staff for a professional body. A presentation given that touches on the issues and the calculation of turnover rates. Interesting measures at page 35.

Download the PDF file .


Labour Turnover Rates are a possible way of identifying problems with our business. Recruitment (or as here, failure to recruit) will also identify problems with systems.

Government booklet on managing staff turnover and sickness absence at work.

Look at page 5 for comments on the costs to the company of absences and of staff turnover on page 26.

Download the PDF file .


Staff Turnover. Balanced Scorecard

It is suggested that schools should be judged on the number of teachers who leave. that would likely make it a Balanced Scorecard measure too.

Download the PDF file .

Download the PDF file .

Download the PDF file .

Download the PDF file .

Download the PDF file .


Staff Turnover.

Investing in your staff to avoid staff turnover costs.

Walmart, which has had a pretty poor reputation as an employer, is changing its policies to encourage staff to stay longer with the organisation. An approach that should lead to lower staff turnover and higher productivity.


 Staff Absences

We normally make a calculation of an average number of days absence when calculating charge out rates/the number of staff required/number of hurs to be paid for etc. there is a cost associated with staff absence, you are paying people but theya re not working. Not surprisingly then, it is a topic of great interest to Human Resources Departments.

here’s information from the CIPD 2105 survey of staff absences.

“Absence levels The average level of employee absence has increased slightly compared with last year, from 6.6 to 6.9 days per employee, although it remains lower than in 2013 (7.6 days). There is, however, considerable variation in absence levels across and within sectors. Average absence has increased most in the public sector (where it is now 50% higher than in the private sector), while it has decreased slightly in manufacturing and production.

The level of absence also tends to be higher in larger organisations, regardless of sector. On average, manual workers have 1.5 more days’ absence per year than non-manual workers.

The overall median cost of absence per employee (£554) has fallen slightly compared with previous years, although there is considerable variation across organisations. As in previous years, the median absence cost is considerably higher in the public sector.

This year we have seen an increase in the proportion of organisations including illegitimate absence among their top causes of longterm absence for non-manual workers (14%, up from 3% in 2014), except in the public sector, where fewer include this among their top causes of absence.

The public sector is more likely than the private to rank stress, mental ill-health and musculoskeletal injuries among their top five causes of short- and long-term absence.”

Download the PDF file .


Check your understanding of the topic with this quick multiple choice quiz. This is a placeholder, quiz coming soon.



Further Reading

I keep other materials worth reading at this location:

Why we need to record Overtime Premium separately.

We talk about one of the reasons for recording the extra it costs to pay overtime as being identifying how many people we could employ instead (and therefore save the cost).

It would appear that the Overtime paid to Metropolitan Police Officers would be enough to pay for 4,000 more Police Officers. Astonishing.

Calculating Labour Costs in a service sector industry.

The reality in most businesses is that employees don’t do exactly the same thing all day long. This is a webinar for american care providers on how they can more accurately determine what labour costs should be applied to different aspects of their work.

I can’t see that you could ever be asked an exam question on this, but ti does illustrate how as management acountants we can apply the theory to practical examples so e can do something useful.

Worth a listen.

Labour costs are not just wages.

We tend to use simple calculations in our seminar and exam questions, but the reality of calculating the true labour costs is a bit more complicated. The “on-costs” of pensions, social security etc. can add significantly to the total costs, and of course, they go up too.

Here is how covering overheads in charge out rates can contribute to high labour charges.


We often take into account an average number of days off sick when calculating available hours. What’s an employer’s attitude to sickness though?

Calculating charge out rates.

When we calculate charge out rates, we discuss that employees can’t be working every minute of every day. there are legitimate reasons for not actually doing chargeable work all the time.

There are also plenty of reasons that there will eb idle time without proper excuse as revelaed in this article:

Impact of wage increases on profitability.


“Living wage legacy: Costa says it will cost £20m, but other retailers are more supportive”

Differing responses to companies on the impact of the Living Wage on profits. For some its all doom and gloom, others point out what a small percentage change it will make to their wages budget. Interesting to review what each category says.

The other side of the argument from Living Wage campaigners.

“In-work poverty is a growing problem in the UK and low pay is closely associated with social disadvantages including poor health, substandard housing and personal debt.

Living Wage employers report a range of benefits including:

  • significantly improved staff retention

  • staff morale

  • workforce productivity

  • enhanced corporate reputation”


Wage Rates.

“Part-time female workers ‘are way off’ living wage.”

“The union umbrella group found that more than 75 per cent of female staff in over 130 parliamentary constituencies earn less than the living wage, the independently calculated rate based on the cost of living.”

Staff Turnover.

Inside Amazon: Wrestling Big Ideas in a Bruising Workplace. The company is conducting an experiment in how far it can push white-collar workers to get them to achieve its ever-expanding ambitions.

Amazon now has a very poor reputation.

“Pay gap between men and women means female bosses work 57 days a year ‘for free'”

This sort of inequality has got to lead to disatisfaction and increased staff turnover. High turnover is very expensive for employers.

“One in seven medical students has considered suicide during their studies, research says”

How are we going to have enough Doctors if this is the level of stress they are put under in training. Think about the implications for us all if we have too few doctors? High staff turnover (and people not completing training would count as staff turnover) causes high costs for a company – it also causes high costs for society as a whole.

“Frankie & Benny’s staff told: ‘We won’t rip you off’ on tips”

A company boss who recognises the value of committed staff and the costs of high turnover!

“The boss of one of Britain’s biggest restaurant groups criticised rivals who charge people to work as waiters and waitresses or remove their tips to make up part of their wages.

“We want our waiters and waitresses to stick with us,” said Danny Breithaupt, chief executive of the Restaurant Group which owns Frankie & Benny’s, Chiquito and Coast to Coast. “That’s why we will never take any of our staff’s tips from them. It’s their money and we don’t want them to feel ripped off.”

He said that in an industry which suffers from high staff turnover anyway it was important to treat staff well.

“I’ve worked on tables myself,” he said. “If you give good service you get well tipped and those customers come back. That’s good for the staff and the business.”–bennys-staff-told-we-wont-rip-you-off-on-tips-10477

Idle Time/Reject Rates/Lost in Process

Wastage in any form is expensive. We know how to calculate the number of units we need to make, hours we need to work etc. to account for the wastage.

Rates can be very high in some businesses and recently published figures for the NHS make disturbing reading.
6.8% of appointments cancelled by the hospitals, 6.4% cancelled by the patients and 6.6% where the patient does not turn up. An inefficiency of potentially 26.6%!

LSBU becomes Living Wage accredited

02 November 2015

Staff at LSBU in conversation

As a London Living Wage accredited employer, everybody working at LSBU, regardless of their role, will receive a minimum hourly wage of £9.15

London South Bank University (LSBU) is pleased to announce that it has been accredited as a Living Wage employer.

The Living Wage commitment will see everyone working at LSBU, regardless of whether they are permanent employees or third-party contractors and suppliers; receive a minimum hourly wage of £9.15 – significantly higher than the national minimum wage of £6.50.

The Living Wage is an hourly rate set independently and updated annually by the Greater London Authority. The Living Wage is calculated according to the basic cost of living using the ‘Minimum Income Standard’ for the UK. Decisions about what to include in this standard are set by the public; it is a social consensus about what people need to make ends meet.

Ian Mehrtens, Chief Operating Officer at LSBU, commented: “LSBU seeks to provide an environment for staff in all roles to be creative and empowered to deliver. We aspire to attract and foster the very best staff who take pride in their university, and take responsibility for its development. Becoming a Living Wage employer is a proud moment for LSBU and sends a clear message that we value our staff highly.”

Employers choose to pay the Living Wage on a voluntary basis. The Living Wage enjoys cross party support, with public backing from the Prime Minister and the Leader of the Opposition.

Living Wage Foundation Director, Rhys Moore said: “We are delighted to welcome London South Bank University to the Living Wage movement as an accredited employer. It is wonderful to see London South Bank University taking a lead and involving the whole community in this step. The best employers are voluntarily signing up to pay the Living Wage now. The Living Wage is a robust calculation that reflects the real cost of living, rewarding a hard day’s work with a fair day’s pay.”

Moving to 24 hour working.

“With the ‘leisured society’ a distant dream we’re working longer and less regular hours than ever”

You don’t have to go back to Keynes in 1928 to find predictions of reduced working hours. It was a regular news item in the 1970s when I was a kid. I feel very cheated!

Interesting article on the impact of night working on staf and performance. A factor to consider when planning 24 hour operations.

“A study published last month by researchers at University California, San Diego, calculated that just one more hour of sleep a week increases wages long term, through increased productivity, by up to 5 per cent. “And this could easily aggregate up to the entire economy level,” says Andre Spicer, professor of organisational behaviour at Cass Business School in London.”

“You’ve probably noticed that one of the groups least likely to work at night is managers”

The Keynes’ lecture..

Download the PDF file .

Possible Written Questions.

(No indication of marks – the more marks a question gets, the more you are expected to write – detail that is, not just words!) If you can’t answer these, you need to do some more reading. I do ‘find’ questions elsewhere, so these aren’t all questions I have used myself.

A company has departments with very different staff turnover rates. Is this always cause for concern?