Budgeting

The manufacturing overhead budget includes the remainder of the production costs not covered by the direct materials and direct labor budgets. In the manufacturing overhead budgeting process, producers will typically allocate overhead costs depending upon their cost behavior production characteristics, which are generally classified as either variable or fixed. Based on this allocation process, the variable component will be treated as occurring proportionately in relation to budgeted activity, while the fixed component will be treated as remaining constant. This process is similar to the overhead allocation process you learned in studying product, process, or activity-based costing.

For Big Bad Bikes to create their manufacturing overhead budget, they first determine that the appropriate driver for assigning overhead costs to products is direct labor hours. The overhead allocation rates for the variable overhead costs are: indirect material of $1.00 per hour, indirect labor of $1.25 per hour, maintenance of $0.25 per hour, and utilities of $0.50 per hour. The fixed overhead costs per quarter are: supervisor salaries of $15,000, fixed maintenance salaries of $4,000, insurance of $7,000, and depreciation expenses of $3,000.

Given the direct labor hours for each quarter from the direct labor budget, the variable costs are the number of hours multiplied by the variable overhead application rate. The fixed costs are the same for each quarter, as shown in the manufacturing overhead budget in Figure 7.11.

BIG BAD BIKES Manufacturing Overhead Budget For the Year Ended December 31, 2019
	Quarter 1	Quarter 2	Quarter 3	Quarter 4	Total
Variable Costs
Indirect Material	$975	$863	$1,350	$2,100	$5,288
Indirect Labor	1,219	1,078	1,688	2,625	6,609
Maintenance	244	216	338	525	1,322
Utilities	488	431	675	1,050	2,644
Total Variable Manufacturing Costs	$2,926	$2,588	$4,051	$6,300	$15,863
Fixed Costs
Supervisory Salaries	$15,000	$15,000	$15,000	$15,000	$60,000
Maintenance Salaries	4,000	4,000	4,000	4,000	16,000
Insurance	7,000	7,000	7,000	7,000	28,000
Depreciation	3,000	3,000	3,000	3,000	12,000
Total Fixed Manufacturing Costs	$29,000	$29,000	$29,000	$29,000	$116,000
Total Manufacturing Overhead	$31,925	$31,588	$33,050	$35,300	$131,863

Figure 7.11 Manufacturing Overhead Budget for Big Bad Bikes.

The total manufacturing overhead cost was $131,863 for 7,050 units, or $18.70 per unit (rounded). Since 6,000 units are sold, $112,200 (6,000 units × $18.70 /unit) will be expensed as cost of goods sold, while the remaining $19,663 will be part of finished goods ending inventory.