The direct labor budget is the one that comes immediately after the production budget. The reason why the latter takes precedence is that it is necessary to know the units to be produced to establish it.
Thus, by knowing the units to be produced, one can establish the total cost of direct labor, and then one can forecast the total disbursements for it. Companies that don’t pay attention to labor management are at risk of labor shortages. In addition, poor workforce management can lead to dissatisfied employees who are constantly uncertain about their job security.
BDC defines labor as follows:
“Labor refers to the human costs of manufacturing. On the income statement of a manufacturing company, labor includes all labor costs associated directly with the manufacturing process, including the receipt and storage of raw materials, and processing and assembly.”
For a commercial or service company, we then speak of salaries.
Workforce management is increasingly complex these days. Fortunately, there are new technologies that can reduce the time you spend managing your human resources.
For example, you could try GoHire for free, which is a simplified recruitment software designed to help you attract and manage candidates.
The company offers over 700 job description templates, one-click job postings, hiring automation, and more.
But when it comes to direct labor budgeting, it is important to predict what will be the cash outflow related to labor.
This means that before using sophisticated tools, you simply need to know how many employees you will need to do the job.
Let’s see how to get this result.
Free Labor Budget
What is the Direct Labor Budget?
Thanks to the units to be produced which are defined by the production budget, the direct labor budget can be estimated.
The direct labor budget forecasts the total cost of direct labor over a period.
With experience and data accumulating, the company can estimate direct labor time per unit, as well as know the cost of direct labor to time. These two elements are essential to obtaining the total cost of direct labor.
Essentially, the latter will act as a disbursement at the cash flow level of the business. Thus, the realization of the direct labor budget makes it possible to obtain one of the components of the cash budget.
How do I budget for direct labor?
The direct labor budget is one of the simplest to make when you have the correct data.
To make a direct labor budget, we start by establishing the number of units to be produced, which we multiply by the direct labor time per unit and the resultant is the total hours. direct labor required. Then, it is possible to multiply this result by the cost of direct labor per hour, which makes it possible to obtain the total cost of direct labor.
You don’t have to break your head to do your calculations, because the free Excel file that we offer is already automated. Now we present how the latter is designed.
(press image to enlarge)
For the sake of simplicity, we have kept the same variables to establish this budget. You can do it as you wish and modify some boxes containing the formulas. If you are less comfortable, only fill in the boxes in yellow, they do not contain any formula.
Here are the components of this budget:
- Unit to produce: This is the resultant of the production budget. Direct labor is based on the number of units to be produced.
- Direct labor time per unit: How long, in hours, it takes to produce one unit.
- Total direct labor hours required: Unit to be produced multiplied by direct labor time per unit.
- Direct labor cost per hour: Amount to be paid for one hour of direct labor. (see next section)
- Total Direct Labor Cost: Total direct labor hours required multiplied by the direct labor cost per hour.
How to establish the average cost of direct labor?
It is not always easy to establish the cost of labor since salaries can be different between employees and they can sometimes work overtime.
The average direct labor cost is based on the total number of direct labor employees and is a function of the company’s labor policy.
Make a list of all direct labor employees. If you don’t want to do it yourself, the free Excel file we have designed contains one.
Here’s what the list we created looks like:
This is a list of employees whose resultant, i.e. the average cost of direct labor per hour (in this example $22.68) is automated into the labor budget. We believe that using historical data is a good starting point for establishing the average cost of direct labor per hour.
In other words, use data from the previous year. Past data is not perfect since direct labor costs vary depending on your company’s turnover.
Use your judgment. Your thinking is the cornerstone of this file. For example, if you think that this year an employee should have a bigger salary, adjust it.
To this Excel sheet, we have added an hourly rate multiplier for overtime.
In our example, the hourly rate during overtime is 1.5 times the hourly rate for normal hours. In short, it is also possible to add the desired number of employees by dragging the corner of the table.
These days, you can use inexpensive technologies that allow you to optimize your human resource management while having the ability to extract much more quality data from it!
Free Labor Budget
The logical continuation of the direct labor budget
At this stage, you should have completed the sales budget, the production budget, and now the direct labor budget. Now two other budgets flow from the production budget. This is the raw materials budget, as well as the budget for indirect manufacturing costs.
If you have already completed the two previous budgets, then you must complete the finished goods inventory budget at the end, as well as the selling and administrative expenses budget and the capital budget.
The whole of the work will allow you to establish the cash budget.
In short, we hope that these budgets will be helpful to you. Please note that this website allows you to learn more about all subjects related to business finance.
If you want to maximize the chances of recruiting the best workforce, you need to put processes in place that set you apart from the competition.
To do this, it is possible to try GoHire for free, which is a simplified recruitment software designed to help companies attract and manage candidates.
The company offers over 700 job description templates, one-click job postings, hiring automation, and more.
So you’ll put the odds in your favor by optimizing all aspects of your labor management!
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