# How to Calculate Your Labor Costs

There are a number of ways to arrive at the labor costs for an item you make. Obviously the first step is to know how much time it takes you to make it. This isn't as simple as it sounds, especially if you're working at home and have multiple interruptions during your work periods.

In order to figure out your labor costs, you will have to set up an hourly wage for yourself. you must determine what dollar per hour rate you are willing to work for.

You can decide on a minimum which you would accept, but remember that you should actually be able to live on this minimum wage whether in reality you have to or not. Right now you may be only working at your business part-time for a little extra income, but some day you may want to make it your full-time career.

## The Value of Your Time

In figuring labor costs, the decision as to what your time is worth is actually a very personal one. The per/hour figure will not be based so much on the going rate as it is on your education and skill, as well as your experience and reputation. Your age, previous jobs, and where you live may also have an effect on it, as well as the demand for your type of work. Finally, there is the ego factor — you want to feel your time and creative efforts are worth a good price. These intangibles are very difficult to put a value on.

For the sake of comparison, let's look at the nationally established minimum wage. Of course, while it keeps creeping higher, it does represent the lowest pay rate for the least skilled worker.

The unskilled beginner gets the minimum wage regardless of his capability, production rate, or the number of mistakes he may make in the course of an average day. The jewelry designer who accepts a rate below this established minimum wage seems to be indicating that she places little value on her own work and skill. Does this indicate a positive attitude? It seems reasonable that the skilled jewelry designer would be paid a rate at least double that of the minimum wage.

The actual figure which you use in your labor costs is of course only a guess. You might say ten dollars an hour when your are just beginning. Later, you might earn fifteen dollars and up—depending on your skill and experience. At the beginning of your venture, it may be very difficult to place a fair value on your time because you will probably put in more hours in start-up or developmental activities than can reasonably be passed on to your customers.

One way to estimate your labor costs is to consider it in terms of what you would pay a skilled person to replace you. Keep in mind the current minimum wage—you could never pay the worker below that and he certainly might expect a higher wage.

Many jewelry entrepreneurs feel that their creative expertise and skill is worth at least \$20 an hour. In most cases they are right, it probably is worth at least that, but pricing your work at that rate may be totally out of reason—especially if you are the entire labor force of your business.

It is hard to justify why a customer should pay you \$20 an hour to perform the more simpler tasks in your production where there is no need for skill and expertise, such as cutting wire, stringing beads, mixing glazes, stocking shelves, sweeping and cleaning up your mess, etc.

In this case you could have several different hourly rates in your labor costs for the various jobs you do. Then you could charge at least \$20 /hour for design and creative time where your skill is needed to produce your jewelry, and a much lower rate for labor and clean up (based on whatever you would have to pay to hire a production worker). Or perhaps, if you prefer to spend all your time designing and creating, hire someone else to perform the more simple time-consuming chores.

You may feel that you cannot afford to hire anyone at this time, but if you take a look at the laws of economics: you will be continuing to earn at least \$20/hour creating and designing, while paying a worker to do the mundane chores at a rate closer to minimum wage.

Let's say you pay your worker \$8/hour for three hours of work a day. If you were to perform these tasks yourself you would be losing \$12/hour which would work out to almost \$180/week. Instead you pay an unskilled worker or student \$100/week, which not only frees up more of your time for designing and creating at a higher pay rate but you will also be producing more products to sell.

## Figure Out A Personal Budget

If you still cannot decide how much one hour of your time is worth for labor costs, then do your calculations backwards. Figure out a personal budget, money that you need to live on—rent, utilities, phone, cable, food, clothing, entertainment, personal loan payments, RRSP's, etc. Next, figure out a salary you would need to cover this budget plus a little extra.

Once you have decided what your annual salary should be, divide this figure by the amount of hours you plan to put into your business for the year. For example, let's say you worked out a personal budget and realized that you need to earn at least \$24,000 a year to cover all your personal expenses plus a little for personal savings. You plan to put 2000 hours a year into your business, therefore, \$24,000 divide 2000 hrs gives you an hourly rate of labor at \$12/hour.

You must also remember that self-employed people must pay for their own medical insurance, vacations, income taxes, and all the materials and overhead costs involved in running a business. While \$10 to \$15 per hour may be a good wage when you're working for someone else, it takes at least two, sometimes three times this amount to make it on your own. This is why it is so important for you to price your work for the biggest possible profit.

You must ensure you are getting paid for every hour you are putting into production, for every little piece of raw material you use, and that all your overhead is covered in the price of your work. These three things only cover your costs to produce the product—you need to add a little bit on top of all that to ensure you have at least some profit.

## Designing Time

Designing time is another labor cost. In setting the cost for designing a specific item, much will depend on whether it is a one-of-a-kind item or a production piece.

If you make one-of-a-kind pieces, you must charge for the designing time to arrive at a fair price in your labor costs, because all the designing time must be assigned to this one piece. It is this designing time necessary to create a unique item which makes the item much higher in price than one which is made on a production basis.

There is also the hours spent testing and trying in order to arrive at the unique item you produced. These hours are usually accountable and you must take them into consideration when setting the price for a one-of-a-kind piece.

When you are creating an item to be produced in quantity you can spread the cost of the designing time over the number of items you will make. A successful design will pay for its designing time very quickly and may also pay for some of the time you spend with a variety of unsuccessful attempts. For items made on a production basis the initial designing time, plus the time to seek out the necessary materials, if they are not at hand, can spread over the entire number to be made. If you design an item and keep making it indefinitely, then the designing costs per item become nil.

## Free Time

In keeping track of time for a particular item, remember that even "free time" cost money and should be considered in your labor costs.

"Free time" is time that you would otherwise be sitting idle waiting. This waiting time is any free time you have sitting around not particularly doing anything really, such as waiting at the pool to pick the kids up after swim lessons, sitting in the waiting room at the dentist's office, or sitting in the car going on trips.

While it seems like free time that you could put to use, it's not really "free" because any time you spend in producing is "production time". If you take advantage of any free time available to you, then you should consider it more like making efficient use of time management.

Any time whether it's free, spare, waiting or what ever, that you use to produce should be included in your pricing calculations. The following is an example of why even your "free time" is valuable:

Mary, a jewelry designer from Calgary, makes and sells beautiful wire wrapped and bead necklaces using wire and gem stones. She she wire wraps the pendants for these necklaces in what she calls "free time" (or in other words waiting time), which is when she is or sitting on the bus when going downtown, or sitting in the waiting room at the doctor's office, or sitting at the arena waiting for the kids to finish their skating lessons, or sitting in front of the television watching her favorite T.V. show, or sitting and having tea with her neighbors, or simply waiting for the casserole to come out of the oven.

She always carries a small plastic container, with gem stones and wire, in her purse with her at all times. When ever she has a few free minutes sitting and waiting she pulls out one of her stones and some wire and starts wrapping the stone. If she was to sit and create the wire wrapped pendant in one sitting it would take an hour, and it takes her a good hour to complete the rest of the necklace which basically consists of stinging beads and stones and attaching the clasp.

When Mary was making out a pricing formula for her necklaces she placed a value on her time at ten dollars an hour for labor costs. Therefore she figures that it takes her one hour to produce a necklace. She didn't include all the time it takes to do the wire wrapping, because to her that's "free time" where she would otherwise be just sitting idly waiting. So her calculations would look something like this:

Labor + Materials + Overhead + Profit (at 10%) = Wholesale
(\$10 x 1 hr) + (\$5.00) + (\$1.50) + (\$1.65) = \$18.15

Her necklaces are unique and very beautiful. After a while Mary decides to approach a couple of stores to take some of her necklaces to sell. Both stores really like her necklaces and figured they would sell well, so they both put in a order for 15 necklaces each, in which Mary accepted and promised to have them delivered to the stores in two weeks time.

When Mary was agreeing to fill the orders she figured it would take her about 30 hrs to produce the necklaces which works out to about 15 hours per week, but in her labor costs calculations she doesn't include how long it takes her to wire wrap the pendants. Is she going to have 30 hours of "free time" within the next two weeks? It takes close to an hour to wrap one pendant and Mary promised to have the necklaces completed in two weeks time.

Now Mary is suddenly faced with 60 hours of work ahead of her rather than 30. Because it is going to take Mary twice as long to make the necklaces then she had calculated, the value on her time and skill has just been chopped in half from ten dollars an hour to now five dollars an hour. Her prices have already been set and it is too late to change them.

When calculating the labor costs in your pricing formula for any item you produce remember that it is important to realize that time is a very precious commodity that should never be given away carelessly. Once you enter the business of selling jewelry, you have to be ruthless about your time.

In the business world time is money, especially when you are producing your own products to sell. Thus is it important for all serious sellers to set some sort of value on their time—even if its only a few spare minutes here and a few spare minutes there. At some point these few spare minutes are going to be enlisted and calculated into full production time.

## Tracking Time

It is vital and important for the success of your pricing formula for the labor costs portion to know exactly how long it takes to make a product. Be sure to keep track of the number of hours and minutes spent on each stage of production.

A good way to keep track of your exact time in your labor costs is to keep a note book handy or a set of 4" x 6" index cards. Have one page or card for each item or, if you are producing in quantity, a page or card for each batch.

Be sure to title your page or card as to what item(s) you are making. If you don't have a name for your products then assign them a number. Then each time you sit down to work on an item or stage of production write down the date and the time you started and the time you finished. Be sure to include your clean up time in each sitting. Also write down exactly what you did and what materials were used during this time.

Keeping accurate and honest records of your production time and labor costs is important for two reasons. First, as you already know is to figure out your labor per item in your pricing formula. As a beginner, you may have to accept a lower rate for your labor costs than you feel you're worth because you are probably not as efficient as you will be with more experience. But don't allow yourself less than the minimum wage, because that's the least you would have to pay someone to replace your efforts.

Efficiency is the second reason to keep close track of how long each stage of production lasts. If your production or labor costs are excessive, meaning you have to charge more for your piece than people will pay, you will have to analyze your methods to see where you can streamline. Your records will show you where you are spending too much time.

Your time records may also help you decide whether to hire someone else to do the routine tasks so you can concentrate on the more creative parts of the production. One successful ceramic bead maker, for example, hires a student to mix the clay and clean up. He has to pay only minimum wage, and he earns a lot more designing and shaping the beads during the time saved from these other non-productive jobs.

On the bottom half of your page or the other side of your index card, you could list your materials used in your product as well as work out your pricing formula.

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