Unit Labour Cost

Posted in Operations and Supply Chain Terms, Total Reads: 755

Definition: Unit Labour Cost

Unit labour cost is obtained by dividing the total labour compensation by the total output produced. It is the labour cost applicable to one unit of output. When the labour costs increase profitability goes down unless it can be passed on to the customer through an increased price of the product. Increase in labour costs are viewed as a potential indicator of inflation.

Labour Costs are divided into 2:

  • Direct Labour Costs which comprise the wages paid to employees who are directly involved in manufacturing the product.
  • Indirect Labour Costs paid to support employees who are not directly involved in making the product like those who maintain factory equipment.

Unit Labour Cost = Total Labour Costs / Total Output

It can also be measured as the ratio of labour charge per hour to the labour productivity. A rise in labour costs indicates greater compensation for the labourers but if it is not accompanied by an increase in labour productivity it indicates a threat to the economy’s cost efficiency. Unit labour costs are hence used as an exclusive indicator of cost competitiveness.

Hence, this concludes the definition of Unit Labour Cost along with its overview.


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