Budgeting Basics and Beyond

9.5. Planning and Control of Direct Labor

Direct labor is paid either by piecework, in which the factory labor is paid so much per piece, or by day work, in which the labor is paid a stipulated hourly rate regardless of the job he is assigned.

Planning and control of direct labor has two primary objectives:

1. To obtain the maximum output from each of the employees

2. To ensure that product costs reflect proper labor charges

Planning and budgeting direct labor costs is considered straightforward for two reasons. First, direct labor operations are normally of a type for which an engineered standard can be properly set.

Standard implies the amount of time it should take an average operator to perform a function under a normal operating condition. Standards are set by such means as average actual time over the years, laboratory experiment, random sampling, or a motion and time study.

Second, because almost all direct labor can be identified with a specific product or job, there is relatively little difficulty in determining where and how much direct labor costs should be charged.

The control function is equally clear. When actual results are reported, they are compared with the plan or target and quickly reveal when plans went astray.