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Calculating the real cost of labor in setting fees


The employer, however, must determine the total cost of the employee and then the total cost of the staff per hour, using that data to set fees according the cost per hour to provide a given service.

Review Table A ("An illustrative employee cost-per-hour analysis," ). Into the basic labor cost goes these factors:

Hourly (the basic hourly rate)
Overtime (1.5 times hourly rate)
Special pay (e.g., incentive pay, profit-sharing, awards)

Then comes the unseen employer's share of the following:
Health insurance
Social Security (required)
IRA (retirement)
Vacations and holidays
Employee discounts on products and services
Worker's Compensation (required)
Unemployment rates (required)

Add these together to get the total cost of the employee. Divide by the hours worked for a pay period. These generally add about $6 to the per-hour cost of the employee.

As noted in Table A, this employee earns $14.50 per hour, but his or her total cost to the practice is $20.60 per hour.

Before the check is cut, make the necessary deductions, including Social Security, Medicare, insurance, IRA or other retirement, federal and state taxes.

Further, as noted in Table A:

The employee's hourly rate is $14.50, with and time and a half for overtime.

The employee also receives monthly profit-sharing and/or awards of $88.

The employer then must pay all the fixed expenses previously mentioned. From the employee's share, deduct Social Security and Medicare, state and federal taxes and the group health plan.

Employees who participate in an employer-sponsored IRA can match up to 3 percent of their wages toward it.

In the end, while the employee appears to net a mere $909.02, the actual cost to the practice for that employee (at $20.60 per hour) this pay period was $1,813.37.

Now, let's again consider the $18 fee:

For this $18 service, because we're paying the employee $20.60 per hour, we are losing $2.60 in real dollars.

If we wish for the cost of labor to be 25 percent of the total P & L at the end of the month, then that fee should have been about $80 ($20 / 0.25 = $80).

Thus this $18 service is worse than a basic loss leader. With loss-leader items, we expect at least to break even.

We should all understand these issues when setting fees based on the true cost of labor.

This calculation makes the payroll more transparent to staff.

Employees should clearly see the connection between their time and fees collected.


Source: DVM360 MAGAZINE,
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