Budgeting Basics and Beyond

6.8. Factory Overhead Budget

The factory overhead budget should provide a schedule of all manufacturing costs other than direct materials and direct labor. Using the contribution approach to budgeting requires the development of a predetermined overhead rate for the variable portion of the factory overhead. In developing the cash budget, we must remember that depreciation does not entail a cash outlay and therefore must be deducted from the total factory overhead in computing cash disbursement for factory overhead.

Schedule 5

To illustrate the factory overhead budget, we will assume that

• Total factory overhead budgeted = $18,300 fixed (per quarter), plus $2 per hour of direct labor. This is one example of a cost-volume (or flexible budget) formula (y = a + bx), developed via the least-squares method with a high R².

• Depreciation expenses are $4,000 each quarter.

• Overhead costs involving cash outlays are paid for in the quarter incurred.

Table 6.5. THE PUTNAM COMPANY Factory Overhead Budget For the Year Ended December 31, 20B

Quarter
	1	2	3	4	Year as a Whole
Budgeted direct labor	4,900	9,100	9,600	6,900	30,500
Variable overhead rate	× 2	× 2	× 2	× 2	× 2
Variable overhead budgeted	9,800	18,200	19,200	13,800	61,000
Fixed overhead budgeted	18,300	18,300	18,300	18,300	73,200
Total budgeted overhead	28,100	36,500	37,500	32,100	134,200
Less: Depreciation[]	4,000	4,000	4,000	4,000	16,000
Cash disbursements for Factory overhead	$24,100	$32,500	$33,500	$28,100	$118,200
[]

^[] Depreciation does not require a cash outlay.