If you lose control of your labour costs, your business finances could spiral out of control. After all, the amount of labour you need should represent the growth of your company.
This is why you need a direct labour budget. This one little document will help make your company more cost efficient by helping you control your direct labour expenses.
And here's why...
Your direct labour expenses in your budget can be fixed or variable costs
You can break all your company costs into two main categories. These are:
1. Variable costs; and
2. Fixed costs.
Once you understand the difference between these costs, you'll be able to allocate labour correctly, and budget for it effectively.
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Here's how your direct labour budget will help you create a more cost efficient company
1. Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labour.
If your company operates in a seasonal industry, you'll treat direct labour as a variable cost. This will help you reduce labour costs during periods of low production. And for periods of high activity, you'll increase labour costs because your production increases.
2. Fixed costs are costs that are independent of output. These don't fluctuate and aren't relevant to output decisions.
Treating labour as a fixed cost can make your company's financial records less useful for decision making because activity levels won't match the labour records.
If you treat labour as a variable cost, you can easily keep track of what is going on inside your business and make quick decisions based on quantifiable results. You then have control of your finances, and your business can operate in a stable environment.
A proper direct labour budget is an essential part of financial and account management so ensure you create one today to achieve better financial management and cost efficiency.
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