Direct Labor Budget Definition
The direct labor budget is used to calculate the number of labor 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 labor 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 labor 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 labor hours. Then multiply the total number of direct labor hours by the fully burdened direct labor 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 labor hours, by position. Otherwise, you will have to calculate this budget manually.
Example of a Direct Labor Budget
ABC Company plans to produce a number of plastic pails during the budget period. The pails are all within a limited size range, so the amount of processing labor related to each one is nearly identical. The labor routing for each pail is 0.1 hours per pail for the machine operator, and 0.05 hours per pail for all other labor. The labor rates for machine operators and other staff are substantially different, so they are recorded separately in the budget. ABC's direct labor needs are outlined as follows:
Direct Labor Budget
For the Year Ended December 31, 20XX
|Quarter 1||Quarter 2||Quarter 3||Quarter 4|
|Product A (units)||5,000||6,000||7,000||8,000|
|x Machine operator hrs (0.1)||0.1||0.1||0.1||0.1|
|=Total machine operator hrs||500||600||700||800|
|x Other labor hours (0.05)||0.05||0.05||0.05||0.05|
|= Total other labor hours||250||300||350||400|
|Machine operator cost/hr||$25||$25||$25||$25|
|Other labor cost/hr||$15||$15||$15||$15|
|Total machine operator cost||$12,500||$15,000||$17,500||$20,000|
|Total other labor cost||$3,750||$4,500||$5,250||$6,000|
|Grand total direct labor cost||$16,250||$19,500
The budget contains two types of labor that are compiled separately, since they have different costs. There are 0.1 machine hours of time required for each product manufactured, which costs the company $25 per hour. Additionally, there are 0.05 other hours of time required for each product manufactured, which cost the company $15 per hour. The table shows the hours required for each labor category by quarter, as well as the cost of each type of labor.
Other Direct Materials Budget Issues
It is not customary to include a cash requirements calculation as part of the direct labor budget. Instead, the cash requirements are calculated for all of the revenues and expenditures of a business as a whole, and are then summarized on a separate page of the budget.
You may find that it is too time-consuming to create a labor budget in detail when there are a multitude of labor classifications, since it is extremely difficult to match the budgeted pay levels to real world staffing. Instead, ongoing turnover in all of the pay classifications will inevitably result in mismatches between what the budget says the company should be paying and what it is actually paying for labor.
Another issue is that direct labor may be an essentially fixed cost within a broad range of production volumes, in which case a detailed rollup of the cost will not necessarily generate better information. If so, it may be sufficient to estimate the direct labor cost based on historical results, and adjusted for expected changes in labor rates.