The efficiency of labour and therefore the costs of labour, in your production cycle, may be due to two factors.

## Wage Increases

Have your salaries to casual staff increased between time periods?

Yes:

Have you passed this cost along to your customers as an increase in price to compensate?

It will take a while for the price increase to reflect in the Gross Profit.  To check the impact, compare the Gross Margin% calculation from a period immediately before the increase with the one after the increase has been fully implemented.

The second one should have gone up.  If you multiply the change by the number of such periods in the year, you should get an estimate of how much your profit will improve.

If not enough, you may not have increased your prices sufficiently to compensate for the labour cost increase.  Note that this is a crude estimate as other variable costs and your revenue may also have changed.

Yes: you may have a Labour Efficiency problem.  See below.

## Falling Labour Efficiency

Typical categories are:

• Non-permanent labour
• Energy and other utilities
• Raw materials, packaging, shipping and transport.

Example:
Calculate a ratio of a cost category e.g. labour to revenue.

Year 1:
Revenue = \$1,000 and
Labour = \$100

The ratio is Cost/Revenue:
\$100/\$1,000 = 10%.

Year 2:
The Revenue and Labour figures give you a ratio of 20%.

• The cost of labour as a component of Revenue has gone up.
• You are putting more labour expense into the product.

Consider why labour has gone up:

• A wage increase.
• Less efficient labour, more is required to do the same amount of work.
• A change in work methods or machinery which is using more labour.

When you have multiple possibilities like this, the 12Faces article 5 Why’s Problem Solving Technique can be useful to work out what has happened.

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