Learning Outcomes
- Prepare a manufacturing overhead budget
The manufacturing overhead budget is prepared depending on how the company allocates overhead. The company can choose to allocate overhead using one predetermined overhead rate, departmental rates, or using activity-based costing.
GelSoft has the following fixed, indirect cost budget for the manufacturing department. These costs do not include any selling, general, or administrative costs. It only includes manufacturing costs that can’t be specifically identified to the products. For instance, the payroll taxes and benefits on direct labor are included in the direct labor allocation rate, but the payroll taxes and benefits on supervisor salaries and other support workers in the manufacturing department are included in overhead, as is depreciation on equipment, repairs, and maintenance, and other expenses of the factory.
Description | Amount |
---|---|
Supervisor Salaries | $150,000 |
Support Staff/Maintenance/Janitorial | 50,000 |
Payroll Taxes and Benefits | 20,000 |
Depreciation on Manufacturing Equipment | 200,000 |
Rent and Property Taxes | 100,000 |
Repairs and Maintenance | 50,000 |
Miscellaneous Expenses | 32,694 |
Total Indirect Manufacturing Expenses | Single Line$602,694Double line |
In addition, the company incurs $1.20 in variable overhead for each unit produced:
Description | Amount |
---|---|
Budgeted units to be produced | 158,605 |
Variable overhead cost per unit | $1.20 |
Budgeted variable overhead | Single Line$190,326 |
Budgeted fixed overhead | $602,694 |
Budgeted manufacturing overhead costs | Single Line$793,020Double line |
GelSoft is going to use a single, company-wide allocation rate based on direct labor hours from the direct labor budget:
Description | Amount |
---|---|
Budgeted units to be produced | 158,605 |
Direct Labor per unit in hours | 0.250 |
Total direct labor hours needed | Single Line39,651 |
Projected labor cost per hour | $40 |
Budgeted cost of direct labor | Single Line$1,586,040Double line |
Total manufacturing overhead = $793,020
Total direct labor hours = 39,651
Predetermined MOH allocation rate = $793,020 / 39,651 = $20.00
This could also be expressed as a quarterly budget:
Description | Q1 | Q2 | Q3 | Q4 | Year |
---|---|---|---|---|---|
Budgeted direct labor hours | 9,250 | 9,750 | 10,275 | 10,376 | 39,651 |
Variable overhead cost per unit | $20.00 | $20.00 | $20.00 | $20.00 | |
Budgeted manufacturing overhead costs | Single Line$185,000Double line | Single Line$195,000Double line | Single Line$205,500Double line | Single Line$207,520Double line | Single Line$793,020Double line |
Before we move on to calculate cost of goods sold based on our work so far, check your understanding of the manufacturing overhead budget.