Labor cost percentage = labor cost ÷ sales. Labor cost is what the hours really cost: wages plus payroll taxes and any benefits, not only the hourly rate. A bakery that pays $8,151 of labor in a month of $25,500 sales has a labor cost percentage of 32.0%. Worked out weekly, the same bakery runs from 29.4% in a busy week to 38.2% in a slow one, because the staff costs nearly the same either way. And if the owner's own 60 hours a week were paid, it would be 50.8%. Below is the formula, what counts, the bakery's four weeks, the owner's hours, how to schedule to a target, and a free calculator.
The short version
- Labor cost % = labor cost ÷ sales, for the same period.
- Labor cost = wages + payroll taxes + benefits, for everyone paid to work.
- Work it out weekly: a monthly figure hides the slow week.
- Sales per labor hour = sales ÷ paid hours, a second way to see the same thing.
- Price in the owner's hours too, or the percentage flatters the business.
- Schedule to a target: hours = sales forecast × target % ÷ what an hour costs.
- TaroStack records the labor minutes on every batch and costs it into each product. More below.
The formulas
| To find | Formula | The bakery's October |
|---|---|---|
| Labor cost | Paid hours × wage × (1 + payroll taxes and benefits) | 494 × $15 × 1.10 = $8,151 |
| Labor cost % | Labor cost ÷ sales | $8,151 ÷ $25,500 = 32.0% |
| Sales per labor hour | Sales ÷ paid hours | $25,500 ÷ 494 = $51.62 |
| Hours to schedule | Sales forecast × target % ÷ cost of an hour | $6,000 × 32% ÷ $16.50 = 116 |
Payroll taxes, workers' compensation and any benefits are part of what an hour costs; the bakery here uses 10% on top of wages for them. Use your own figure from your payroll reports.
An example: a bakery's October
Red Clay Bakehouse, a made-up bakery in Athens, Georgia, I use in these examples, pays its bakers and counter staff an average of $15 an hour:
| Week | Sales | Paid hours | Labor cost | Labor % | Sales per labor hour |
|---|---|---|---|---|---|
| October 5 to 11 | $6,200 | 120 | $1,980 | 31.9% | $51.67 |
| October 12 to 18 | $5,100 | 118 | $1,947 | 38.2% | $43.22 |
| October 19 to 25 | $6,800 | 124 | $2,046 | 30.1% | $54.84 |
| October 26 to November 1 | $7,400 | 132 | $2,178 | 29.4% | $56.06 |
| October | $25,500 | 494 | $8,151 | 32.0% | $51.62 |
The month's 32.0% looks steady. The weeks aren't: the second week's sales fell $1,100 and the hours fell by two, so its labor percentage jumped more than six points. A bakery's mornings need a baker whether 40 customers come or 80, which is why labor percentage moves opposite to sales. The last week, with a home game in town, carried more sales on nearly the same crew. How the labor in each recipe is worked out, minute by minute, is in how to compute labor cost in baking.
The owner's hours
The owner works about 60 hours a week, unpaid, decorating cakes and opening. Priced at $20 an hour, those 240 hours in October are $4,800 of labor the percentage leaves out. With them, labor is $12,951 of $25,500, 50.8%. The 32.0% isn't wrong, but it describes a bakery that only works because its owner isn't paid. When the owner wants a day off, or a wage, the bakery has to pay for 60 more hours a week; the plan for that starts with the honest number.
What a good labor cost percentage is
Low enough that labor, ingredients and the rent still leave a profit. Labor and ingredients together are often called prime cost; if ingredients are 30% of sales and labor 32%, 38% is left for rent, power, card fees, repairs and profit. A bakery that makes everything from scratch by hand runs a higher labor percentage than a shop that bakes from mixes, and makes up for it in price. Track your own weekly percentage, and look at what changed when it moves. How much of each sale is left to pay the fixed costs is in contribution margin example.
Scheduling to a target
Turn the formula round, and a sales forecast says how many hours a week can afford. At a 32% target and $16.50 an hour with taxes:
| Week | Sales forecast | Target | Labor budget | Hours to schedule |
|---|---|---|---|---|
| November 2 to 8 | $6,000 | 32% | $1,920 | 116 |
| November 9 to 15 | $6,400 | 32% | $2,048 | 124 |
| Thanksgiving week | $9,800 | 30% | $2,940 | 178 |
Thanksgiving week's pie orders let the bakery schedule 62 more hours than an ordinary week and keep labor at 30%, because the preorders are known in advance. Scheduling to a forecast only works if the forecast does; preorders and last year's same week are the best guides.
Get the calculator
Download the labor cost percentage calculator. Two sheets: labor cost percentage, one line a week with sales and paid hours, where the labor cost, labor % and sales per labor hour fill in from your average wage and payroll taxes, with the owner's unpaid hours priced in beside it; and schedule to a target, where a sales forecast and a target percentage give the labor budget and the hours to schedule. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
A labor percentage says how much of the till went to wages; it can't say which products ate the hours. The bakery's decorated cakes take an hour each and its cookies a minute; a week heavy with cake orders looks like a bad labor week when it's a good cake week. Seeing that takes labor by product, from the batches.
How TaroStack does it
TaroStack records the labor minutes on every batch and costs it into each product.
Labor on the batch. Each batch records its labor minutes beside its ingredients, so a pan of cinnamon rolls carries the minutes it took, and its cost includes them.
Actual against standard. A batch's actual cost sits beside the recipe's standard cost, so a batch that took twice the minutes it should shows, by product, the week it happened.
Margins by product. Margins are reported by product and by customer, with the labor in each, so the cake orders and the cookie trays each show what they leave after the hours. How costs drift from the recipe is in food cost variance formula.
| The job | Spreadsheet | In TaroStack |
|---|---|---|
| Labor % by week | Payroll ÷ sales | Payroll ÷ sales, as here |
| Labor in each product | A guess | Minutes on every batch |
| A batch that took too long | Unnoticed | Actual cost beside standard |
| Which products pay for the hours | Not worked out | Margins by product |
Recipes, batches, labor minutes and margin reports are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.