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.
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.
|Direct Labor Budget|
|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|