Labor and Overhead Budgets

In a manufacturing environment the direct labor budget provides the framework for planning staffing needs and costs for the production process. As revealed by the labor budget, the scheduled budgeted production in units is multiplied by the number of hours necessary to produce each unit. The resulting total direct labor hours are multiplied by the expected hourly cost of labor to determine total expected production direct labor costs.

The third component involved in production budgeting, after direct materials and direct labor, involves manufacturing overhead which includes production-specific items such as maintenance and repair on equipment, factory equipment depreciation, miscellaneous factory supplies (indirect), supervisory salaries in the factory, factory utilities and factory property taxes. The total of expected overhead is calculated then must be allocated (or assigned) to each unit of product produced during the period. The allocation of the total overhead can be based on numerous items, with the factory overhead budget illustrated below using direct labor hours.

Manufacturing costs are subdivided into variable and fixed categories. Variable overhead expenses change based on volume of production such as indirect supplies increase as production increases; while fixed overhead expenses are a set amount for the budget period. Examples are the salaries for production supervision and plant executives and depreciation of plant assets which do not change with changes in production level within a period.  

Source: principlesofaccounting.com, Larry M. Walther, Copyright 2016.

 

 

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