Direct Labor Cost Budget
In order to convert direct materials into finished goods, you need direct labor. Labor cost budget is calculated on the basis of labor hours required for budgeted production volume and labor hour relate to each type of labor force. This allows management to anticipate hiring needs, as well as when to schedule overtime, and when layoffs are likely. Given expected/budgeted production, The Engineering and Personnel Department can work together to determine the necessary labor required for the production/factory department. The direct labor cost budget tells you how many direct labor hours of work you’ll need, indicating whether you have enough workers or need to hire more. The direct labor budget is useful for anticipating the number of employees who will be needed to staff the manufacturing area throughout the budget period.
Labor requirements are stated in a total number of workers, a specific number of skilled, and unskilled workers and production hours needed for given production volume. Labor costs computation includes monetary costs and fringe benefits given to the labor force. The budget provides information at an aggregate level, and so is not typically used for specific hiring and lay off requirements.
A general format for labor cost budget is given below:
Direct Labor Cost Budget
…………………………………………………………..Product A………..Product B……..Total
Budgeted production units…………………..XXX…………………..XXX
Direct labor hour per unit of output……..XXX…………………..XXX
Budgeted total labor hours:…………………XXX…………………..XXX
Rate per DLH………………………………………..X $…………………….X$
Budgeted Direct labor costs…………………..$XXX…………………$XXX………..$XXX
[To compute direct labor requirements, expected production volume for each period is multiplied by the number of direct labor hours required to produce a single unit.]
The direct labor budget is typically presented in either a monthly or quarterly format. It helps the management to plan its labor force requirements. Direct labor budget is a component of the master budget. This budget will also give you an idea of your expenses for your product, and thus your expected profit.
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