From the course: Accounting Foundations: Budgeting

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Master budget exercise: The manufacturing overhead budget

Master budget exercise: The manufacturing overhead budget

From the course: Accounting Foundations: Budgeting

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Master budget exercise: The manufacturing overhead budget

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- The manufacturing overhead budget includes all production costs other than those for direct materials and direct labor. Because manufacturing overhead is a major element of total manufacturing cost in many organizations, those organizations that are able to effectively plan and control this cost have a significant advantage in the marketplace. In preparing a manufacturing overhead budget, the first step is to estimate the annual variable and fixed manufacturing overhead cost. To keep things simple for our example, we will assume the variable costs are to be allocated on the basis of direct labor hours. That is, those overhead costs increase in proportion to our direct labor costs. And this makes sense. More direct labor hours means the need for more electricity, more wear and tear on the equipment, more need for supervisory time, and so forth. Now, back to our Brigand Boat example. In preparing this manufacturing overhead budget, Brigand's accounting department first estimates the…

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