Factory Overhead Budget

The factory overhead budget shows all the planned manufacturing costs which are needed to produce the budgeted production level of a period, other than direct costs which are already covered under direct material budget and direct labor budget. The overhead budget is an operational budget contained in the master budget of a business. It has two sections, one for variable overhead costs and other for fixed overhead costs.

Total variable overhead may be calculated as the product of estimated variable cost per unit (also called variable overhead rate) and the budgeted production units (obtained from production budget). However most businesses will prefer to prepare a detailed overhead budget showing individual variable costs such as electricity, fuel, supplies etc.. The fixed overhead costs are calculated as the sum of individual fixed overhead costs for example rent, depreciation, etc. which are planned for the period.

It is also useful to calculate the expected cash disbursements for factory overhead costs at the end of overhead budget.

Format and Example

The following example illustrates the format of a simple overhead budget. The variable overhead per unit of Company A during the first, second, third and fourth quarter is estimated to be $12, $15, $16 and $19 respectively. The production units figures are obtained from the production budget of the company. The company expects to incur monthly depreciation of $3,000 and monthly rent of $2,500. There are no other fixed costs.

Company A
Factory Overhead Budget
For the Year Ending December 30, 2010
 
 Quarter 
 1234Year
Variable Factory Overhead:
Budgeted Production Units1,3349121,1481,7785,172
× Variable Overhead Rate$12$15$16$19 
Total Variable Overhead$16,008$13,680$18,368$33,782$81,838
Fixed Factory Overhead:
Depreciation9,0009,0009,0009,00036,000
Rent7,5007,5007,5007,50030,000
Total Fixed Overhead$16,500$16,500$16,500$16,500$66,000
Total Factory Overhead$32,508$30,180$34,868$50,282$147,838
− Depreciation9,0009,0009,0009,00036,000
Cash Disbursements for FOH$23,508$21,180$25,868$41,282$111,838

Written by Irfanullah Jan