How to Calculate the Direct Labor Budget for the Upcoming Fiscal Year

Direct labor costs are wages paid to employees to manufacture a product. Because of rising and falling demand, you need to create a budget for the coming year. This will tell you how much you need to spend in each month, and help predict when you need to hire or layoff employees. This budget will also give you an idea of your expenses for your product, and thus your expected profit. Your budget for direct labor costs is dependent on your production expectations. After you know how much you plan to produce, you can calculate the direct labor costs.

  1. 1.

    Average all the wages in your production department. Add all of the wages you pay per hour, then divide by the number of employees. This is your average wage per hour. For example, you might find that your employees earn on average $12 per hour.

  2. 2.

    Calculate the number of labor hours required to produce each unit. Include all departments that handle the product during production. You want a figure for one unit. Example: A toy requires the cutting department, sewing department and finishing department to put in .25 hours per unit. Observe your employees at work on products and time each department's handling of units.

  3. 3.

    Multiply the number of hours per unit times the average cost per hour. In the example, .25 hours times $12 per hour equals $3 per unit. Your direct labor cost would be $3 for each unit you produce.

  4. 4.

    Multiply the labor cost for each unit times the total number of units you plan to produce. For example, if you foresee producing 100,000 units, you know your cost will be $3 times 100,000 for a total direct labor cost of $300,000.

  5. 5.

    Break your total labor costs down into monthly costs. For each month, project how many units you plan to produce, and multiply by your per-unit labor cost. This will show you how much money you need to spend on labor each month of the coming fiscal year.