Direct Labor Budget:
Learning Objectives:
- Define and explain direct labor
budget.
- Prepare direct labor budget.
-
Definition and explanation of direct labor budget
-
Example
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.
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 |
| |
Quarter |
|
| |
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. |
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
management
of
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.
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