Labor is the creator of value. There are other variables that create value, such as demand or management, but labor is the first and primary measure and also the variable directly associated with profitability. "Labor efficiency" is a general term that deals with the amount that workers produce in a certain time period, given the amount that is paid to them during this same period of time.
Instructions
1. Lay out your main variables. Start with the number of workers working on the product, but not support staff. Figure their wages and the amount of the product they actually produce. Remember, "direct labor" refers to those workers actually producing something. It does not refer to human resources, the accountant, maintenance staff or anyone else not actually making the item.
2. Decide on a period of time to analyze. If wages are hourly, compute the total wages per hour over any given day, week or month. This depends on the nature of your analysis and the product being made. If workers are salaried, divide their yearly salary amount --- including payroll taxes and benefits --- for the specific period. If a worker gets $50,000 a year, and you are doing an efficiency analysis for one week, divide 52 into 50,000 to get the weekly wages.
3. Gather all the relevant data on the "standard" figures for workers making the same product at the same rate. The entire point of this is to compare the present, actual labor cost per unit against some standard. This can be other factories making similar products or even a standard figured out by management as to what the "optimal" cost per unit would be. The analysis makes no sense without a standard against which to measure actual labor costs.
4. Standardize all variables. This means that all variables must refer to the same time periods, products and wages. If your unit of time is five days of work, make sure your standard and all other calculations use five days. After that, the math is easy.
5. Use the above variables to figure out how much money it takes for a worker to make one item. If your factory is paying total wages of $1,000 daily to produce 10 items, the total labor cost per item per day is $100. If you have 10 workers earning $1,000 a day among them, then it costs $10 per worker to make one item.
6. Look at the standard figures. If others have argued that it should take only $900 to produce the 10 items, given the present level of productive capital, there is something wrong with your factory. Assuming the standard figures are indeed optimal, the present state of the factory is somewhat inefficient. Each worker in your competitor's factory is making the same item for $9, not $10.
