Direct Labor Budget

Direct Labor Budget:

Learning Objectives:

  1. Define and explain direct labor budget.
  2. Prepare direct labor budget.
  1. Definition and explanation of direct labor budget
  2. Example

Definition and Explanation:

The direct labor budget is developed from the production budget. Direct labor requirements must be computed so that the company will know whether sufficient labor time is available  to meet the budgeted production needs. By knowing in advance how much labor will be needed throughout the budget year, the company can develop plans to adjust the labor force as situation requires. Companies that neglect to budget run the risk of facing labor shortages or having to hire and lay off workers at awkward times. Erratic labor policies lead to insecurity, low morale, and inefficiency.

Example of Direct Labor Budget:

Following is the direct labor budget for Hampton Freeze Inc. (see explanation of this budget)

Hampton Freeze, Inc.
Direct Labor Budget
For the Year Ended December 31, 2003

1 2 3 4 Year
Required production in cases (see production budget page) 14,000 32,000 36,000 19,000 101,000
Direct labor hours per case 0.40 0.40 0.40 0.40 0.40
——– ——— ——– ——– ——–
Total direct labor hours needed 5,600 12,800 14,400 7,600 40,400
Direct labor cost per hour $15.00 $15.00 $15.00 $15.00 $15.00
——– ——– ——– ——– ——–
Total direct labor cost* $84,000 $192,000 $216,000 $114,000 $606,000
===== ===== ===== ===== =====
* This schedule assumes that the direct labor work force will be fully adjusted to the total direct labor hours needed each quarter.

Explanation of the direct labor budget for Hampton Freeze Inc.

The first line in the direct labor budget consists of the required production for each quarter, which is taken directly from production budget (see production budget page). The direct labor requirement for each quarter is computed by multiplying the number of units to be produced in that quarter by the number of direct labor hours required to make a unit. For example, 14,000 cases are to be produced in the first quarter and each case requires 0.40 direct labor hour, so a total of 5,600 direct labor hours (14,000 cases × 0.40 direct labor hour per case) will be required in the first quarter. The direct labor requirements can than be translated into budgeted direct labor costs. How this is done will depend on the company’s labor policy. In direct labor budget schedule above the managementof Hampton Freeze Inc. assumes that the direct labor force will be adjusted as the work requirements change from quarter to quarter. In that case, the direct labor cost is computed by simply multiplying the direct labor hour requirements by the direct labor rate per hour. For example, the direct labor cost in the first quarter is $84,000 (5,600 direct labor hours × $15 per direct labor hour).

However many companies have employment policies or contact that prevent them from laying off and rehiring workers as needed. Suppose, for example, that Hampton Freeze has 25 workers who are classified as direct labor and each of them is guaranteed at least 480 hours of pay each quarter at a rate of $15 per hour. In that case, minimum direct labor cost for a quarter would be as follows:

25 workers × 480 hours per worker × $15 per hour = $180,000

Note that in direct labor budget the direct labor cost for the first and fourth quarters would have to be increased to a $180,000 level if Hampton Freeze’s labor policy did not allow it to adjust the work force at will.

You may also be interested in other articles from “Budgeting and planning” chapter:

  1. Profit Planning
  2. Participative or Self Imposed budgeting
  3. Human Factors in Budgeting
  4. Zero Based Budgeting (ZBB)
  5. Budget Committee
  6. Master Budget
  7. Sales Budget
  8. Production Budget
  9. Inventory Purchases Budget for a Merchandising Firm
  10. Material Budgeting | Direct Materials Budget
  11. Labor Budget
  12. Manufacturing Overhead Budget
  13. Ending Finished Goods Inventory Budget
  14. Selling and Administrative Expense Budget
  15. Cash Budget
  16. Budgeted Income Statement
  17. Budgeted Balance Sheet
  18. International Aspects of Budgeting

Other Related Accounting Articles:

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