Lesson 1, Topic 1
In Progress

The Direct Labour budget

The direct labour budget is used to calculate the number of labour hours that will be needed to produce the units itemized in the production budget. A more complex direct labor budget will calculate not only the total number of hours needed but will also break down this information by labor category. The direct labour budget is useful for anticipating the number of employees who will be needed to staff the manufacturing area throughout the budget period. This allows management to anticipate hiring needs, as well as when to schedule overtime, and when layoffs are likely. The budget provides information at an aggregate level, and so is not typically used for specific hiring and lay off requirements.

The direct labor budget is typically presented in either a monthly or quarterly format. The basic calculation used by the budget is to import the number of units of production from the production budget and to multiply this by the standard number of labour hours for each unit. This yields a subtotal of the direct labor hours needed to meet the production target. You can also add more hours to account for production inefficiencies, which increases the amount of direct labour hours. Then multiply the total number of direct labor hours by the fully burdened direct labour cost per hour to arrive at the total cost of direct labor.

If you have a material requirements planning software package that has a planning module, you may be able to load the production budget into the planning module and have it calculate the required number of direct labour hours, by position. Otherwise, you will have to calculate this budget manually.

Following are the calculations involved in the direct labour budget:

Planned Production in units
× Labour Hours Required per Unit
= Budgeted Direct LaborHours Required
× Cost per Direct LaborHours
= Budgeted Direct Labor Cost

Format and Example

Following is an example showing a simple budget format. The planned production figures are obtained from the production budget of Company A.

Company A
Direct Material Purchases Budget
For the Year Ending December 30, 2010
 
 Quarter 
 1234Year
Planned Production in Units1,3349121,1481,7785,172
× Direct LaborHours per Unit3.53.53.53.53.5
Budgeted Direct LaborHours4,6693,1924,0186,22318,102
× Cost per Direct Labor Hour$4$5$5$5 
Budgeted Direct Labor Cost$18,676$15,960$20,090$31,115$85,841

SELF-CHECK ACTIVITY

2. Describe direct labour budget with example?