Direct Labor Budget: Definition, Example & Formula

Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

A direct labor budget shows the cost and total hours of labor needed to manufacture the units indicated in the production budget. Explore the definition and formula of a direct labor budget, learn how to prepare this type of budget, and study an example. Updated: 12/14/2021

Direct Labor Budget

Business accounting is quite different from just balancing your checkbook at home. After all, a typical company usually has much more money to manage than the average American household. However, it also has many more expenses, and those expenses have to be accounted for in very specific ways. This is not only for the purposes of tax reporting but also because good managers want to know where their money is going. As a result, firms must prepare specific budgets for different areas of expenses within their companies.

One of the most common examples of this type of budget is a direct labor budget. A direct labor budget keeps track of all the labor-related expenses as they directly relate to manufacturing. In this lesson, learn how to prepare a direct labor budget as well as how it factors in to other types of accounting documents.

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  • 0:05 Direct Labor Budget
  • 0:54 Preparing a Direct…
  • 1:52 Other Factors and Uses
  • 2:39 Example
  • 4:09 Lesson Summary
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Preparing a Direct Labor Budget

First things first, make sure there is access to all the numbers needed to prepare a direct labor budget. To find those, start by looking at the production budget, which shows how many units have to be manufactured. In addition, find out the hourly cost of labor and the amount of labor needed to manufacture each unit. From here, it is just a matter of multiplying these numbers together to find the total labor cost. First, multiply the total number of units by the cost in time to produce each unit. That gives the total number of hours necessary. Then multiply that by the cost per hour for labor to get the total labor cost.

Of course, companies rarely make one product that just has one set amount of time necessary to build it, nor do they typically pay everyone the same. As a result, direct labor budgets often break down the labor cost for each type of good created by a company, taking into account the different wage costs and different time commitments associated with each.

Other Factors and Uses

As stated, the direct labor budget borrows heavily from the production budget to get its figures. However, it doesn't stop there. The total labor cost as calculated in the direct labor budget is crucial to being able to calculate a company's master budget, as well as its balance sheet and budgeted income statement. Both of these help make sure that a company can meet its bills and continue to produce goods.

However, it's not just as an accounting tool that the direct labor budget offers its worth. It can also be used by human resources managers to help anticipate when a company may need to make new hires, as well as in determining how much vacation time to award each year. In fact, the direct labor budget can even help determine approval of vacation at times when too many people have requested off from work.

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