Manufacturing Overhead Budget
Manufacturing Overhead Budget Definition
The manufacturing overhead budget contains all manufacturing costs other than the costs of direct materials and direct labor (which are itemized separately in the direct materials budget and the direct labor budget). The information in the manufacturing overhead budget becomes part of the cost of goods sold line item in the master budget.
Also, the total of all costs in this budget are converted into a per-unit overhead allocation, which is used to derive the cost of ending finished goods inventory, and which in turn is listed on the budgeted balance sheet. The information in this budget is among the most important of the various departmental budget models, since it may contain a large proportion of the total amount of a company's expenditures.
This budget is typically presented in either a monthly or quarterly format.
Example of the Manufacturing Overhead Budget
Delphi Furniture produces Greek-style furniture. It budgets the wood raw materials and cost of its artisans in the direct materials budget and direct labor budget, respectively. Its manufacturing overhead costs are outlined as follows:
Manufacturing Overhead Budget
For the Year Ended December 31, 20XX
|Quarter 1||Quarter 2||Quarter 3||Quarter 4|
|Administrative payroll taxes||10,000||10,000||11,000||11,000|
|Freight in and out||8,000||7,000
|Travel and entertainment||3,000||3,000||3,000||3,000|
|Total manufacturing overhead||$238,000||$237,000||$236,000||$237,000|
The administrative salaries line item contains the wages paid to manufacturing supervisors, the purchasing staff, production clerks, and logistics planning staff, and gradually increases over time to reflect changes in pay rates. The depreciation expense is relatively fixed, though there is an increase in the third quarter that reflects the purchase of new equipment. Both the freight and supplies expenses are closely linked to actual production volume, and so their amounts fluctuate in conjunction with planned production levels. The rent expense is a fixed cost, but does increase in the fourth quarter to reflect a scheduled rent increase.
The budget could also include a calculation of the overhead rate. For example, direct labor hours could be included at the bottom of the budget, which are divided into the total manufacturing overhead cost per quarter to arrive at the allocation rate per direct labor hour.
Much of the information in this budget can be estimated from historical results, if the types of products manufactured and production volumes do not vary significantly from prior periods.
Other Manufacturing Overhead Budget Issues
A less-common format for the manufacturing overhead budget is to group the line items into fixed and variable expense classifications. It can be difficult to determine the fixed or variable status of a cost, in which case you can add a third cost grouping for mixed costs that contain both fixed and variable cost characteristics. Separate treatment of variable expenses is useful if you want to create a flexible budget, where the budgeted amount of variable costs change to match the amount of actual revenues earned.
In a simplified budgeting environment, the overhead budget may be as simple as an overhead rate that is multiplied by some form of activity, such as direct labor hours or machine time used. This approach is generally not recommended, since it does not reveal the precise nature of the various types of expenses incorporated into the overhead rate, and could even be used by a less ethical manager to increase his manufacturing budget without making it visible to the rest of the management team.
It is not customary to include a cash requirements calculation as part of the manufacturing overhead budget. Instead, the cash requirements are calculated for all of the revenues and expenditures of a business as a whole, and are then summarized on a separate page of the budget.
The manufacturing overhead budget is also known as the manufacturing budget, the factory overhead budget, and the overhead budget.
Budgeted balance sheet
Budgeted income statement
Direct labor budget
Direct materials budget
Ending finished goods budget
Selling and administrative expense budget