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9.3: Direct Labor Budget

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    Learning Outcomes

    • Create direct labor budget

    Ok, so Hupana Running Company is getting all set for the new year. We have our sales budget, and know how many pairs of shoes we plan to sell. From that information we created our production budget, so we know how many pairs we need to produce each quarter, and how many we want in finished goods inventory at the end of each quarter. We also then figured out how much raw materials we need to bring in each quarter to keep our production facilities humming along.

    So now we need to determine our direct labor needs. Direct labor includes all of the employees who are required to actually manufacture the shoes. These are the people working on the production floor. This information is important, so they don’t run into a labor shortage and can plan for potential adjustments in their labor needs. Another use for this budget is to schedule plant shutdowns for cleaning and maintenance. Without the completion of the other budgets we have done, we couldn’t fill in all the blanks in the direct labor budget!

    So what new information might we need to complete this budget? Well the biggest one is how much time does it take to complete a pair of shoes? Then we need to know our cost per hour for our direct labor. This cost per hour includes wages, payroll taxes and fringe benefits for each of our production employees. Don’t forget those things, as they can make a huge impact on the cost of an employee per hour!

    So let’s figure out our labor information.

    One pair of shoes takes .5 labor hours @ $20/ hour average

    We already know how many pairs we need to make each quarter, so let’s get started on our direct labor budget!

    Hupana Running Company Direct Labor Budget
    Quarter Q1 Q2 Q3 Q4 Total
    Required production in pairs 450 500 500 600 2050
    Direct labor hours-pair 0.5 0.5 0.5 0.5 0.5
    Total direct labor hours needed 225 250 250 300 1025
    Direct labor cost per hour $20 $20 $20 $20 $20
    Total direct labor cost $4,500 $5,000 $5,000 $6,000 $20,500

    So we used the required production in pairs from our previous budgets. We noted above the time needed and the cost per hour for our manufacturing employees. With that information in hand, we can calculate our direct labor costs. We now know, how much we will spend each quarter on labor, and can staff properly!

    Is all this budgeting fun starting to make sense? Let’s go over what we know so far.

    We know our sales, production schedule, raw materials cost, direct labor cost and what we will have in finished goods and raw materials inventory at the end of the year! Are we having fun yet?

    On to manufacturing overhead!

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