The Direct Labor Budget is one of the budget types you’ll need to know about for the CMA exam. It can be controlled by outside forces; labor unions being the most important among them.
Usually, there is an increase in the cost of direct labor whenever older labor contracts are completed, and fresh contracts are initiated.
Furthermore, technological advancements which require a change in the production process may require changes in employee skill levels. Hiring employees with higher skill levels impacts the direct labor budget.
Employee Benefit Statement
Besides employee salaries, all other employee expenses are included in the direct labor budget.
The employee expenses included are worker’s compensation insurance, contributions to Medicare and Social Security, federal unemployment taxes, health, and life insurance premiums whenever applicable, and many other employee benefits.
All these additional expenditures are presented in the Employee Benefit Statement.
Variable Amounts of Employee Costs
Usually, expenses related to employees differ based on their salaries. However, some of these expenses are fixed amounts.
The variable amounts of employee expenses include the employer’s share of the social security contribution, unemployment compensation taxes, workers’ compensation insurance, and employer’s share of Medicare.
Pension plan contribution is another variable employee expense.
Projecting Employee Related Expenses
Companies do not project employee-related costs with 100% accuracy. They follow an approximate method of weighted average cost and implement that factor to the whole budgeted salaries for a select employee group in calculating the costs for that group.
Since several employee-related costs are variable, this is the right method to budget for them.
To develop this approximation factor, companies need to analyze historical employee-related expenses as a percentage of employee salaries.
A business develops many direct labor budgets. Each of these budgets represents a distinct class of labor employed.
Accounting for Employee Related Expenses
A business must choose how it plans to account for the expenses of employee benefits – both budgeted and actual.
These expenses are included under the cost of direct labor or considered as an employee overhead and assigned to the units produced.
Sometimes, these expenses are treated as a period expense. The method in which these variable employee expenditures are accounted for will have an impact on the cost of goods sold, revenue, or inventory budgets.
However, in instances where direct labor makes up a large chunk of the variable employee expenses, this difference will be significant.
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