How does a fully burdened labor rate work?

Definition

A fully burdened labor rate is the all-in hourly cost of one employee, including the extras on top of the wage. On the books, this is a planning number used to price a job or read a schedule, not an account you debit or credit.

A dental office that pays a hygienist $40 an hour still owes employer tax, benefits, and insurance on that person. Those extras turn the $40 hour into a higher true hour.

Cash-basis and accrual books both still post the wage and the extras as they happen. The rate is only the shortcut that folds those pieces into one hourly figure.

This rate is the all-in hour. It is not the wage on the stub, and it is not the fee the patient is billed.

Where it shows up

Balance Sheet: Related to the payroll costs this rate folds in.

P&L: Related to the all-in labor cost used to price a job.

See also: Labor Burden · Direct Labor · Job Costing

When you look at your Balance Sheet, you will not see a fully-burdened-rate line. You see the unpaid wages and extras the rate is built from, sitting in accrued payroll or payroll tax liability.

When the rate is current, a cleaning's labor quote is close to what the week will actually cost. When it is stale, the office is pricing from last year's benefits or last year's tax rates.

The Income Statement does not print this rate. Related cost shows up as cost of services when the visit is delivered, using the actual wage and extras.

On the Statement of Cash Flows, payday and the tax deposit are the cash events. The rate itself does not move cash.

A payroll accrual still has to be posted at month-end for hours that crossed the close. The rate is only how you thought about those hours before the week began.

How it works

The office starts with the hourly wage, or with salary divided by expected hours. That is the base.

It then adds the extras that belong to that person: employer tax, workers' compensation, health coverage, retirement match, and similar items. Those extras are labor burden, expressed as dollars per hour or as a percent of the wage.

The two pieces added together are this rate. A $40 wage plus $16 of extras is a $56 hour.

Stay with the all-in hour when you read this figure. The patient's billed fee is revenue; this rate is only what the hygienist costs the office.

Some offices divide the extras by hours paid. Others divide by hours that can be charged to a patient, which makes the rate higher because not every paid hour is a chair hour.

Do not treat the rate as proof the extras have been posted. The books still need the wage entry and the extras entry when the hours are earned.

A raise, a new benefit, or a change in expected hours all change the rate. Recalculate when those inputs move, or the quote will drift from the true cost.

After a visit is delivered, the P&L shows actual wage and extras, not the planned rate. The rate was the plan; the register is the result.

Example

A dental office pays a hygienist $40 an hour and expects 32 chair hours in a 40-hour week. Employer tax, workers' compensation, and benefits on that person come to $512 a week.

The extras are $512 divided by 32 chair hours, or $16 per chair hour. Added to the $40 wage, the fully burdened labor rate is $56.

There is no rate account to post. The books still record $1,280 of wages and $512 of extras when the week is earned, using the actual register.

A 50-minute cleaning that uses one chair hour has to cover $56 of labor before any other office cost. If the office bills $90 for that cleaning, $34 is left after this labor.

The Income Statement does not show $56 as its own line. It shows the week's actual wage and extras, which should land close to the planned $56 if hours and benefits held.

Common mix-ups

A fully burdened labor rate is not the hourly wage. The wage is one input; this rate adds the extras and, often, divides by chair hours rather than paid hours.

A fully burdened labor rate is not a ledger account. You do not debit or credit the rate when a visit is delivered.

A fully burdened labor rate is not the fee you charge. The fee is what the patient pays; this rate is what the employee costs.

Related terms

• Labor Burden: The payroll taxes, benefits, and insurance layered on top of base wages.
• Direct Labor: Wages for the people who directly make the product or deliver the service.
• Job Costing: Tracking revenue and cost for each individual job, project, or order.
• Billable Hours: Hours worked that can be charged to a client.
• Effective Hourly Rate: Revenue collected divided by total hours worked.
• Cost Of Services: The direct cost of delivering services, used in place of cost of goods sold.
• Timesheet: The record of hours worked, used to drive payroll and job costing.
• Gross Margin: Gross profit expressed as a percentage of revenue.