Labour ratios

As part of performance management a firm may wish to try to monitor and control its labour costs. This page looks at typical labour ratios that can assist in this.

Labour turnover

Calculation

Labour turnover is a measure of the proportion of people leaving relative to the average number of people employed.

• Management might wish to monitor labour turnover, so that control measures might be considered if the rate of turnover seems too high, and the business is losing experienced and valuable staff at too fast a rate.
• Labour turnover is calculated for any given period of time using the following formula:

Causes and costs of labour turnover

Causes

It is important to try to identify why people leave an organisation and to distinguish between avoidable and unavoidable causes of labour turnover.

• Causes of labour turnover - avoidable:
  • poor remuneration
  • poor working conditions
  • lack of training opportunities
  • lack of promotion prospects
  • bullying in the workplace.
• Causes of labour turnover - unavoidable:
  • retirement
  • illness/death
  • family reasons (e.g. pregnancy)
  • relocation.
• Efficient managers will investigate high levels of labour turnover and aim to keep that turnover rate at a minimum.

Costs

Every time an employee leaves, an organisation will incur costs that are associated with replacing the employee. These costs are known as replacement costs.

• Replacement costs include the following:
  • advertising costs
  • cost of selection (time spent interviewing etc.)
  • training new employees
  • reduced efficiency until the new employee reaches the required skill.
• A high labour turnover rate tends to lower the performance of employees who remain in the organisation. Such employees may become restless and resentful of the extra burden of training new members and of additional temporary duties imposed upon them.
• In order to keep the labour turnover rate to a minimum, organisations should aim to prevent employees from leaving. Such preventive measures come with their own costs, known as preventive costs.
• Preventive costs include the costs associated with escaping the avoidable causes of labour turnover:
  • pay competitive wages and salaries if remuneration is poor
  • improve poor working conditions
  • offer good training opportunities
  • make sure promotion prospects arise as necessary.
  • stamp out bullying in the workplace
  • investigate high labour turnover rates objectively

Labour efficiency, capacity and production volume ratios

Labour efficiency ratio

Labour is a significant cost in many organisations and it is important to continually measure the efficiency of labour against pre-set targets.

• The labour efficiency ratio measures the performance of the workforce by comparing the actual time taken to do a job with the expected time.
• The labour efficiency ratio is calculated using the following formula:

Idle time ratio

Sometimes the workforce is 'idle' through no fault of its own, and cannot get on with productive work. This happens if machines break down,or need to be reset for a new production run. An idle time ratio can be calculated as follows:

Labour capacity ratio

The labour capacity ratio measures the number of hours spent actively working as a percentage of the total hours available for work(full capacity or budgeted hours). The labour capacity ratio is calculated using the following formula:

Labour production volume ratio ('activity' ratio)

• The labour production volume ratio compares the number of hours expected to be worked to produce actual output with the total hours available for work (full capacity or budgeted hours).
• The labour production volume ratio is calculated using the following formula:

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