Lesson 1, Topic 1
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The Manufacturing Overhead budget

A manufacturing overhead budget contains all the costs, other than raw materials and labour, that will be incurred by a manufacturing company or department during a fiscal year. These ongoing costs are a valid part of manufacturing expenses you incur and should be calculated as part of your manufacturing budget. Review the elements that make up manufacturing overhead to make sure you are counting these in your manufacturing overhead budget.

The components of Manufacturing Budget: –

Insurance

A manufacturing company or department must make insurance payments, regardless of how many units are manufactured. This expense is part of the cost of being in the manufacturing business and should be considered as manufacturing overhead.

Rent or Mortgage

Rent or mortgage on property for production facilities is also part of manufacturing overhead. The building must be paid for in order to provide a location for manufacturing. These costs include land and property, along with any remodelling, refurbishing, or customizing.

Equipment

Equipment is an overhead expense for manufacturing. Payments must be made on leased equipment, and equipment that is purchased depreciates in value. These expenses belong to the manufacturing department and should be counted as part of the manufacturing budget.

Utilities

Incurred utility expenses must be paid for a manufacturing facility. While this expense can vary according to how much electricity and other energy is used, it is usually treated as a fixed cost a facility incurs no matter what level of production is attained.

Supplies

A variety of supplies, besides raw materials, are necessary in manufacturing. These can include order forms, office supplies and cartons or boxes. Because these supplies would not be necessary without the manufacturing department, they are considered part of manufacturing overhead.

Taxes

The company must pay taxes on real estate, equipment, supplies and any other items that are purchased and not resold. This expense is counted as manufacturing overhead.

Interest on Loans

A manufacturing company that has debt must pay interest. Interest payments add to the expense of manufacturing and are a legitimate part of the calculations of manufacturing overhead.

Calculate Manufacturing Overhead Costs

To properly budget manufacturing overhead for your company, you first have to determine the exact overhead costs for each month.

Manufacturing overhead costs refers to anything that helps the production process run as smoothly as possible. These costs can include wages for machine handlers, quality control inspectors, and other workers that work directly to ensure proper production. It can also refer to the costs of equipment repairs and maintenance. Manufacturing overhead costs can also be facility fees such insurance, utilities, and property taxes.

Note: Manufacturing overhead costs don’t include money spent on direct labour or direct materials for your company.

Calculate Overhead Percentage

Once all monthly manufacturing overhead costs have been calculated, you need to determine the overhead percentage. This indicates the percentage that you’ll need to pay for manufacturing overhead every month.

To do this, take your monthly overhead costs and divide it by your company’s monthly sales. Then multiply it by 100.

For example, if your company has $100,000 in monthly manufacturing overhead and $600,000 in monthly sales, the overhead percentage would be about 17%. This means 17% of your monthly revenue will go toward your company’s overhead costs.

SELF-CHECK ACITIVITY

  1. Explain manufacturing overhead budget and its components?
  2. How to calculate manufacturing overhead cost and overhead percentage?