 hello in this lecture we're gonna continue on our master budget and we will be working on the direct labor budget at this time so remember what we have done so far we have to start off in this way we did the sales budget in order to know what we're gonna sell we have we sell we have to do that first first a word from our sponsor yeah actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but but that's okay whatever because our merchandise is is better than their stupid stuff anyways like this cpa thinking cap for example cpa thinking cap you see what we did with like with the letters and this cpa thinking cap is not just for cpa's either anyone can and should have at least one possibly multiple cpa thinking caps why because based on our scientific survey of five people all of whom directly profit from the sale of these cpa thinking caps wearing this cpa thinking cap without a doubt according to the survey increases accounting productivity tenfold yeah at least yeah apparently the hat actually channels like accounting energy from the quantum field ether directly in your head allowing you to navigate spreadsheets faster it's kind of like how in like the matrix when neo learns kung fu or at least that's what the scientific survey saying so get one because the scientific survey participants could really use some extra cash if you would like a commercial free experience consider subscribing to our website at accounting instruction dot com or accounting instruction dot think of it dot com and then we did the production budget in terms in terms of how much units we're going to need to produce based on the sales budget then we did the raw materials budget we need to do these two budgets the production budget before we do the raw materials budget and now we're going to work on the direct labor budget notice of course we don't really need to do the raw materials before the labor budget but we do however need to do the sales budget and the production budget in order to determine how much labor it's going to we will need in order to fulfill our obligations in the budgeting process the direct labor is a little bit easier a little bit more straightforward to my mind so this is how we're going to take a look at that we're going to start off with a similar area that we started off the materials budget which would be that we need to have know how many units we're going to produce then we can see how many hours it's going to take to produce them and then we can estimate how much it's going to cost per hour in order to produce these so where are we going to get the production in units well that's going to equal in july the number that we determine in the production budget so remember the production budget tells us how many units we actually need to produce and it's not equivalent to the units that we will we will think that we're going to sell because we had to go through this process to determine how many units we need to produce and we came up with this nineteen five eighty six for july and that's where we're going to start for the direct labor budget for july and we're going to do that same process i could copy it across but i'm going to just point to it for august so that we could see exactly where it's coming from a few different times so it's going to be coming from the production budget for august in this case i'm going to hit tab so there's that number the twenty thousand and then in september the production the direct labor budget we're taking this number from the production budget being the twenty thousand five hundred units that we will be producing then of course what are we going to need to know in order to determine our budget for labor we're going to need how many hours does it take to create one unit and note that there are some conversion problems sometimes we pay people generally hourly if a problem gives you minutes then you're going to have to convert two hours most likely and note that that conversions can be a little bit trickier than you would think because you know there's 60 minutes in an hour and whatnot so just if you if your problem happens to have minutes in it and doesn't give you hours but gives you an hourly rate just make sure that you're going to have to perform that conversion here we're saying that the labor hours required to finish a unit are point five or half an hour so it's going to take point five hours to make a unit and therefore we're just going to say point five here and point five and point five that's how many that's how much time it's going to take in order to create make the units therefore we're going to take the nineteen five eighty six times the point five and enter so that means that it's going to take nine thousand uh seven ninety three now again you might want to ask well where are they going to come up with the point five obviously a problem like this would have to give you the point five in real life we would come up with with some type of estimates on how long it would take to create one individual unit and and there's going to be different theories on terms of how we'll come up with that number at a later time but a problem like this will generally give you that number so we'll multiply that out for august this is how many units we need to produce times it's going to take point five hours per unit and tab and then for september we're going to take twenty thousand five hundred units times point five per unit so we now have the number of hours it's going to take for july august and september and then we're going to multiply that times the labor rate once again the the problem is going to have to give you a labor rate here we're going to say it's fourteen dollars according to the problem fourteen and once in real life of course we'd have to come up with the labor rate in some way as well and it might have to be some type of estimate so we're going to say it's going to cost us on this estimation fourteen dollars per hour so fourteen and fourteen once again remember that when we think about a problem like this we usually are going to be given the rate in hours so if again if you if it's a problem that's given you how many minutes it takes to do a certain task you're going to have to do some type of conversion most likely and that will give us our labor in dollars so that means that if we if it's going to take 9793 hours then we're going to multiply that times fourteen dollars per hour to give us the dollar amount of 137.99 same thing for august we're going to say it's going to take 10 000 hours times 14 dollars per hour means we have 140 000 we could copy this formula across i'm just going to do it a few times just to get the calculation the formula in this equals the 10 290 times the dollars per hour and we could sum them up two different ways here i'm going to sum up the total hours for the quarter equals the sum of the total hours for the quarter for july august and september and that'll give us 30 000 1043 hours for the quarter if we multiply those hours times of course the rate per hour the budget for the quarter in dollars 425.99 that should tie out if we add up the dollar amount for july august and september which is 425.99 so now we can continue on to the factory overhead budget and the factory overhead budget is usually pretty straightforward in a master budget such as this so we'll go through this fairly quickly there's going to be two types of the overhead we got the variable and the fixed portion in order to calculate the variable portion oftentimes we're going to have some added information such as a very variable factory overhead rate so in this case if we take a look at our information we have a predetermined variable overhead rate per labor hour so remember what that means is that we're basically using the labor in order to help us to allocate the overhead so that's going to be some kind of averaging method for us to allocate the overhead we'll talk about how we come up with that number at a later time in a master budget like this they're going to have to give us some format in which we will allocate the overhead and so in this case we have a variable portion which is going to be the 2.6 times the labor hours and then we're also going to have a fixed portion in this case just being the depreciation of the 21 000 that one's not going to change it's going to be fixed same rate over each month so in order to work this problem we're going to have the total labor hours needed because that's our base on which we're going to allocate the variable portion and so we're going to we're going to get that from the direct labor budget where we just calculated that and so we have the 97 9793 for july in august and you can copy this across of course but i'm just going to do it three times so we can see exactly where it's coming from august we got it's the 10 000 and september equals the 10 250 so those are the total direct total labor hours needed per month and then we're going to multiply that times the variable factory overhead rate which is given to us in the problem so here it's given at 2.6 so we're going to say 2.6 and that's going to be all the way across this our dollars that we're basically allocate now i want to point out here that that 2.6 does not mean 2.6 per hour as if we're paying it in wages this but this although we're using labor hours the 2.6 is allocating overhead labor is just a way that we're going to use to allocate the overhead so if we multiply that out then we're going to say that this equals for july the total labor hours times the factory overhead rate it's the predetermined factory overhead rate and then in august we have the number of labor hours times the predetermined factory overhead rate yes you could copy this across but i'm just going to do the calculation so we could see it three times september times the predetermined overhead rate and then we could total this up we could equal the sum of the variable overhead for july august and september all right then we're going to have the budgeted fixed overhead and in this problem the fixed overhead is just going to be this 20 21 000 of depreciation so that's going to be straightforward fixed fixed costs are pretty easy for us the budget for they're going to be the same each month so that's pretty easy for us so we're just going to say all right that's 21 000 per month we know it's the depreciation it looks like it's a straight line depreciation so 21 000 each month we're going to sum that up equals the sum of for the quarter of july august september third quarter we have the 63 so then if we add that up that'll give us the total overhead for july so this equals the variable portion plus the fixed portion will give us the total of 46 461 for july august yes you can copy this cross but i'm going to do it just so we can see it a few times we've got the variable portion plus the fixed portion and then ooh not times not times delete equals the variable portion plus the fixed portion tab and then uh we have the september variable portion plus fixed portion tab and once again we should be able to do this two different ways we could do the same calculation the variable portion for the quarter plus the fixed portion for the quarter or we can add up july august and september quarters for the same 141 111 in the formula bar here