Manufacturing Overhead Budget: Definition, Preparation & Example

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  • 0:02 A Manufacturing…
  • 0:51 Preparing One
  • 2:18 Tying It in with Other Budgets
  • 3:41 Example
  • 4:13 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson you'll learn how to make a manufacturing overhead budget for your business. Learn what things you need to include and what things are linked to other budgets.

A Manufacturing Overhead Budget

If you want to successfully run your own manufacturing company to make the products you sell, you need to have a working manufacturing overhead budget. This type of budget shows you just how much it costs you to run your manufacturing facility. It doesn't include your materials cost or the employee costs to make your products; that goes on other budgets. What this budget helps you with is seeing just how much you need to spend per month or per quarter to keep your facility running.

Now imagine that you have your own manufacturing company that makes all kinds of pillows for people. You found a way to automate the making of these pillows in any shape the customers want, so people can order donut-shaped pillows or dog-shaped pillows. To keep on top of your manufacturing company, you have a manufacturing overhead budget.

Preparing One

What did you have to do when you prepared your manufacturing overhead budget? Let's see. Budgets shouldn't be too complicated, nor too simple. They need to capture all the costs associated with the particular budget. So, for your manufacturing overhead budget, you need to capture things like the rent and utilities for your manufacturing facility. You also need to consider the maintenance costs along with the depreciation of your manufacturing equipment. Another part of your manufacturing overhead budget is the cost of your freight shipping, including the cost to send out your finished goods to your stores as well as the cost to move your finished goods from the manufacturing facility to your warehouses.

Your manufacturing overhead budget also includes employee costs needed to run the manufacturing facility. Remember that employee costs to make your products are not included in this budget, so employee costs here are for the maintenance and upkeep of the manufacturing facility itself. Your facility needs employees to keep it clean, to keep the machines maintained, and to handle the financial aspects of running it.

For your pillow manufacturing facility, your manufacturing overhead budget might look like this:

Manufacturing Overhead Budget Example 1

In this example, you've broken up your costs by quarter. These budgets are usually calculated either per month or per quarter. You can see that your costs for the fourth quarter were a little bit higher. This was because you had more finished goods to move around for the holiday season, so your freight costs were a little more for the fourth quarter. You can also see that having a manufacturing facility is fairly costly.

Tying It in with Other Budgets

Once you've calculated your manufacturing overhead budget, you can now use it in your other budgets. One other budget that your manufacturing overhead budget is part of is your master budget. Your manufacturing budget is part of your master budget's cost of goods sold line item. Your manufacturing overhead budget can also be used as part of the calculation for your cost of ending finished goods inventory. It is also used to directly calculate your overhead percentage.

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