Question

Oswald Company is preparing its direct labor budget for 2016 from the following production budget based on a calendar year:

                                Quarter                        Units

                                    1                             60,000

                                    2                             30,000

                                    3                             45,000

                                    4                             75,000

Each unit requires 2 hours of direct labor. The union contract provides for a 10% increase in wage rate to $11 per hour on October 1.

1. Prepare a direct labor budget for 2016.

2. Discuss any 3 rationale behind your budgets that you have prepared above.

Answer 1

1-
Quarter	1	2	3	4
units to be produced	60000	30000	45000	75000
direct labor hour per unit	2	2	2	2
total labor hours required per quarter	120000	60000	90000	150000
labor hour rate	11	11	11	12.1
total labor cost per quarter = total labor hours*labor hour rate	1320000	660000	990000	1815000

2- Rationale of direct labor budget

1- it helps in estimation of labor hours required

2- it helps in estimation of total labor expense and any change in labor rate

3- It helps in estimation of any change in total labor expense due to change in labor rate