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 | |||||
| 1 | 2 | 3 | 4 | Year | |
| Variable Factory Overhead: | |||||
| Budgeted Production Units | 1,334 | 912 | 1,148 | 1,778 | 5,172 |
| × Variable Overhead Rate | $12 | $15 | $16 | $19 | |
| Total Variable Overhead | $16,008 | $13,680 | $18,368 | $33,782 | $81,838 |
| Fixed Factory Overhead: | |||||
| Depreciation | 9,000 | 9,000 | 9,000 | 9,000 | 36,000 |
| Rent | 7,500 | 7,500 | 7,500 | 7,500 | 30,000 |
| 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 |
| − Depreciation | 9,000 | 9,000 | 9,000 | 9,000 | 36,000 |
| Cash Disbursements for FOH | $23,508 | $21,180 | $25,868 | $41,282 | $111,838 |
by Irfanullah Jan, ACCA and last modified on