University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

6

Pages:

2
Author:

stud_ice13

Direct Labor Budget for a Service Firm In a service firm, the direct labor budget estimates the labor hours and costs required to meet service demand. It is vital for pricing, workforce planning, and profitability. The budget for direct labor helps avoid underestimating or overestimating the labor costs, which can either lead to lower pricing (resulting in losses) or higher pricing (resulting in losing clients). Let’s assume we are preparing a direct labor budget for an accounting firm handling tax filings. The firm anticipates serving several clients, and the number of direct labor hours needed for each client is estimated based on past experience. We will also assume an hourly wage for the staff. Assumptions for Direct Labor Budget: • • • The firm expects to serve 100 clients in the budget period. Each client takes an average of 10 hours of work to complete. The average hourly wage for labor is $50. Direct Labor Budget Details Amount 100 clients Number of clients Direct labor hours per client 10 hours Total labor hours required 1,000 hours $50/hour Hourly wage rate $50,000 Total direct labor cost • • Total Labor Hours Required: The firm requires 1,000 direct labor hours (100 clients × 10 hours per client). Total Direct Labor Cost: The total labor cost is $50,000 (1,000 hours × $50 per hour). Revenue per Employee Analysis Revenue per employee is a common metric used to measure workforce productivity. It indicates how much revenue each employee generates and helps assess whether labor costs are aligned with revenues. Formula for Revenue per Employee: Revenue per Employee=Total Revenue Number of Employees Assumptions for Revenue per Employee Calculation: • • Total Revenue for the firm is $250,000 for the budget period. The firm employs 5 staff members (employees). Calculation: Revenue per Employee=$250,0005=$50,000 per employee Analysis: • • Revenue per Employee: The firm generates $50,000 in revenue per employee, which means each employee contributes this amount toward total revenue during the budget period. This metric helps in evaluating if the staffing levels are adequate or if there’s an opportunity to improve efficiency. If the revenue per employee is lower than expected, it might indicate inefficiencies in labor utilization, whereas a higher figure could show high productivity or underutilized labor capacity. Conclusion: • • The direct labor budget for the service firm shows that $50,000 is required for direct labor costs to serve 100 clients in the budget period. The revenue per employee ratio of $50,000 per employee is a useful benchmark to track workforce efficiency. Higher ratios generally indicate better workforce performance in generating revenue per labor dollar spent.