• Share
Send to a Friend via Email

Your suggestion is on its way!

An email with a link to:

was emailed to:

Thanks for sharing About.com with others!

How to Prepare a Direct Labor Budget

Developing the Operating Budget for a Company

If we use ArtCraft Pottery as our example, which comes from the article on Budgeting - How to Develop the Operating Budget, the following information can be used to develop the direct labor budget:

Information

The direct labor budget shows the direct labor cost and the total direct labor hours needed to produce the number of units in the production budget. The budgeted hours of direct labor are determined by the relationship between labor and output, just as in the direct materials budget, which you should refer back to. Direct labor costs are part of cost of goods sold.

Exercise

As an exercise, assume that a product uses two hours of direct labor per unit. Expected production for the year is 1,250 units. The average wage cost per hour is \$8. What is the budget for direct labor cost?

Budget = (2 X 1,250)3 X \$8 = \$20,000

Direct Labor Budget for ArtCraft Pottery

Referring back to our example, suppose that it takes 0.12 hours to make a single pot and that the average wage rate is \$10 per direct labor hour. Below is the direct labor budget for ArtCraft Pottery, the example we use in the development of our operating budget example and explanation.

ArtCraft Pottery

 Direct Labor Budget Quarter 1 2 3 4 Year Units to be Produced 1,060 1,260 1,600 1,800 5,720 Direct Labor Time Per Unit in Hrs x0.12 x0.12 x0.12 x0.12 x0.12 Total Hrs Needed 1,060 1,260 1,600 1,800 5,720 Avg Wage per Hr x\$10 x\$10 x\$10 x\$10 x\$10 Total Direct Labor Cost \$1,272 \$1,512 \$1,920 \$2,160 \$6,864
2. Money