Manufacturing Overhead Budget

Learning Outcomes

  • Prepare a manufacturing overhead budget

A flowchart titled “Types of Budgets”. The manufacturing overhead budget is highlighted in yellow. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the operating budget. There are also arrows pointing from the cost of goods sold budget and the SG&A budget to the cash 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.

GelSoft
Fixed Manufacturing Overhead Budget
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:

GelSoft
Manufacturing Overhead Budget
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:

GelSoft
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:

GelSoft
Manufacturing Overhead 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.

Practice Question