The Direct Labor Efficiency ratio tells you how much gross profit you generate for every dollar you spend on direct labor. It's a quick way to see how hard your labor dollars are working for you.

Direct Labor Efficiency = Gross Profit ÷ Direct Labor Cost

The higher the ratio, the more efficient your direct labor is. For example, a ratio of 2.5 means that for every $1 you spend on direct labor, you produce $2.50 in gross profit. A higher number means each labor dollar is generating more profit; a lower number means less.

Use it to gauge how well your labor is converting into profit, and to watch the trend as your actual numbers come in against your budget.

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