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Why you need a direct labour budget right now

by , 19 September 2014
You've heard of a production budget, cash flow budget, financial budget and a sales expense budget. In fact, you already have these budgets in place.

But, what about a direct labour budget? You need to implement this budget urgently if you're serious about correctly assessing your staffing needs and budgeting for them correctly.

Not convinced?

Read on to discover three reasons why you need a direct labour budget right away.

Here are three reasons you need a direct labour budget

#1: A direct labour budget shows the quantity and cost of direct labour you'll need. You can then calculate the costs of the direct labour and be able to price your product correctly.

The cost of direct labour calculation is as follows: Required hours of direct labour x anticipated cost per unit = cost of direct labour you need.

For example David needs 2 000 bricks which will take approximately 55 hours to manufacture. He has only one direct labourer who costs R8.00 per hour. So the cost of direct labour needed = 55 hours x R 8.00 = R 440.00.

Note: Direct labour includes people who are directly involved in making the product. They contribute the labour that becomes part of the finished product.

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Here are two more reasons why you need a direct labour budget

#2: Overtime will never be a problem because you work it into your direct labour budget.

#3: A direct labour budget gives you greater control because it allows you to plan for production.

If production rises, you may have to hire more staff to keep up. If sales go down again, you may need to reduce costs and get rid of staff. And the most efficient way to manage these fluctuations is with a direct labour budget.

Now that you know why you need a direct labour budget, check out the Practical Accountancy Loose Leaf Service for steps on how to create one.

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