F2 - Budgeting - Direct labour cost budget

CCarlo8y ago

Hi Struggling to calculate the answer for the following question: "A Company manufactures a single product, M. Budgeted production output is 200 units. Each unit takes 6 hours for completion and the company estimates 20% idle time. Labour is paid at $7 per hour." What is the direct labour cost budget for August? I think the point they are making here is that for every 6 hours to complete, there is also an additional 20% wasted time on top of that? I would be grateful if you were able to help me calculate the answer and explain how to deal wth idle time. Thanks Carlo

John MoffatTutor8y ago#1

For every 100 hours that they pay for, 20 will be idle and therefore 80 will be worked. Putting it the other way round, for every 80 hours of work, they will be paid for 100 hours. Therefore for 6 hours of work they will have to pay for 100/80 x 6 = 7.5 hours, and therefore the labour cost per unit will be 7.5 x $7 = $52.50.