What Is the Purpose of a Direct Labor Budget?

Management accounting is an internal business function that records and reports financial information relating to a company's production process. Direct labor and the direct labor budget are part of this information. Budgets ensure that companies do not overspend for economic resources.

Facts

Direct labor represents the individual workers whose activities directly relate to the production of goods and services, hence the term "direct labor." Companies use direct labor budgets to determine how many workers are necessary to produce a certain amount of goods. Budget variances can indicate favorable or unfavorable expenditures.

Example

Manufacturing and production companies are primary users of direct labor budgets. A company may desire to produce 100,000 widgets, with each one requiring .50 direct labor hours at $7.00 in hourly costs. Therefore, the company should budget $350,000 for the widget production.

Purpose

Budgets play an important role in the manufacturing and production process because companies will allocate each production cost to products. Spending too much money on specific activities will raise individual product costs, requiring companies to charge consumers for inefficient operations.

References

• Business Dictionary: Direct Labor
• All Business: Direct Labor Budget