Manufacturing Overhead Budget

The manufacturing overhead budget estimates indirect manufacturing costs for a future period.

For example, Galaxy Furniture plans to produce ten thousand chairs in the upcoming budget period.

Its manufacturing overhead includes indirect materials, indirect labor, and factory operating costs.

Indirect materials, such as sandpaper and glue, are variable overhead because their total cost increases as more chairs are produced.

Indirect labor includes employees who support production but do not work on a specific chair.

Factory operating costs, like utilities, are variable and increase with the level of activity, while rent and insurance remain fixed for a specified range of activity.

Managers first estimate total variable overhead based on planned production and then add fixed overhead to calculate estimated total manufacturing overhead for the period.

To apply overhead to products, managers calculate a predetermined overhead rate by dividing estimated total manufacturing overhead by expected labor or machine hours.

This budget helps managers plan, allocate, and control manufacturing costs effectively.