Direct labor budget

Definition

A direct labor budget estimates the total cost of direct labor required to meet production goals for a specific period. It is a crucial component of an operating budget, helping businesses plan workforce needs and associated costs.

5 Must Know Facts For Your Next Test

1. Direct labor budgets are based on production schedules and standard labor times per unit.
2. They help ensure that a company has enough labor hours available to meet production targets without incurring unnecessary overtime costs.
3. The budget includes both the number of labor hours required and the cost per hour of labor.
4. It assists in cash flow planning by predicting future payroll expenses.
5. Adjustments may be needed if there are changes in production levels or labor rates during the budget period.

Review Questions

• What information is typically included in a direct labor budget?
• How does a direct labor budget assist in cash flow planning?
• Why might a company need to adjust its direct labor budget during the budget period?

Related terms

Operating Budget:

A comprehensive financial plan covering all aspects of a company's operations for a specific period.

Production Budget:

An estimate of the number of units that must be produced to meet sales needs and ending inventory requirements.

Cost of Goods Sold (COGS): The direct costs attributable to the production of goods sold by a company, including materials and direct labor costs.