What is a Manufacturing Overhead Budget?

Manufacturing Overhead Budget

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Manufacturing Overhead Budget

A Manufacturing Overhead Budget is a financial plan that outlines the projected costs of all indirect manufacturing activities for a specific period. This budget includes expenses that are indirectly tied to the actual production of goods, meaning they aren’t directly linked to labor or materials but are still essential to the production process.

These overhead costs can include, but are not limited to:

A well-prepared Manufacturing Overhead Budget is crucial for businesses to better manage their resources, control costs, and plan for profitability. It’s also important for pricing decisions, as understanding overhead costs helps companies price their products in a way that ensures all costs are covered and profit margins are maintained.

Example of a Manufacturing Overhead Budget

Let’s imagine a hypothetical company, Widgets Inc., which produces widgets. Let’s develop a simple Manufacturing Overhead Budget for the upcoming quarter.

The company incurs the following overhead costs:

  • Depreciation: Widgets Inc. uses machinery which depreciates $10,000 every quarter.
  • Utilities: The cost for electricity, water, and other utilities amounts to $15,000 per quarter.
  • Maintenance: The maintenance and repair of machinery and equipment cost $5,000 per quarter.
  • Rent: The rent for the factory is $20,000 per quarter.
  • Insurance: The insurance premiums for the manufacturing operations amount to $3,000 per quarter.
  • Indirect Labor : Salaries for the factory supervisors, janitors, and other non-direct labor personnel amount to $12,000 per quarter.

So, the Manufacturing Overhead Budget for the quarter would be calculated as follows:

  • Depreciation: $10,000
  • Utilities: $15,000
  • Maintenance: $5,000
  • Rent: $20,000
  • Insurance: $3,000
  • Indirect Labor: $12,000

Total Manufacturing Overhead: $65,000

Therefore, Widgets Inc. would plan for $65,000 in manufacturing overhead costs for the upcoming quarter. This budget would help the company in cost control, planning for resource allocation, and in setting appropriate product prices.

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