Why is tracking Direct Labor Hours So Important?

There is no metric more important if you are a company in the trades or manufacturing than direct labor hours. As a Part time CFO performing CFO Services, I know the performance and productivity of a business in the trades or a manufacturing business are best evaluated by tracking the metrics which involve direct labor hours.

The hours worked by those employees who work on actual production of a product or who work on performing a service are Direct Labor Hours. Payroll records can track these hours, however payroll may also include travel and down time. It’s best to exclude travel and downtime when at all possible, and account for that time separately.

The key metrics I like to track are:

Sales Per Hour – To get the Sales Per Hour, divide Sales by the Direct Labor Hours. Whether or not your pricing has integrity and how efficient your direct laborers are can be deciphered through this metric.

Overhead Per Hour – To get the Overhead Per Hour, divide your Total Overhead by your Direct Labor Hours. Often, the small business owner is confused about how to ensure the overhead will be covered in their selling price. Overhead Per Hour will tell you what your overhead cost per hour is and apply that to your selling price, which ensures you are covering your overhead.

Material Cost Per Hour – To get the Material Cost Per Hour, divide the Cost Of Materials Needed (to produce the product or perform the service) by Direct Labor Hours. It’s a bad sign if this metric is too high. It means that either you are not buying effectively (prices are too high), or you are inefficiently consuming materials.

Utilizing metrics will enable you to spend more time finding new business. A Part Time CFO can help you calculate metrics using the heart and soul of managing your trades or manufacturing business–Direct Labor Hours. Tracking Direct Labor hours will identify for you key metrics so you can evaluate performance and productivity in your business.

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