How to Determine a Factory Overhead Budget

Creating a factory overhead budget gives you a way of comparing your estimated costs against your actual costs. You build a budget by estimating your production output and the related costs. Each month you can compare your factory overhead budget amounts to the actual production expenses to get an idea if your costs are running under or over budget. This can help you find ways to adjust your actual costs so they are more in line with your budget estimates. A factory overhead budget helps you monitor and control your production costs to improve your profit margin.

Identify the Factory Overhead Costs

Factory overhead is the indirect expenses incurred in your manufacturing process. It does not include your direct materials and direct labor costs. Factory overhead costs are found on and off the production floor. Some factory overhead production floor costs are the wages paid to forklift and material handlers, product inspectors, quality-control inspectors and equipment repair and maintenance personnel. Factory overhead costs incurred off the production floor include utilities, insurance expenses and property taxes for the manufacturing facility.

Estimate the Total Costs

When you put together a budget, you are estimating the size of your production run along with the indirect costs. Budgets are normally prepared on a yearly basis and are broken down by month. Unless your production operations have dramatically changed, you can use the budget from the prior year as a starting point. The budget figures are updated with any price changes from the previous years’ prices. Indirect wages are based on the estimated number of non-direct labor work hours that are involved in keeping the production line running and in support activities such as repairs and maintenance.

Factory Overhead Cost Per Unit

Divide the total factory costs by the number of the units you estimate will be sold or produced. This ensures all units share an equal amount of the factory overhead expenses. To calculate the estimated factory overhead cost per unit, divide the total costs by the estimated production amount. For example, say your total factory overhead costs are $30,000 and your estimated production for the year is 10,000 units. Divide $30,000 by 10,000 units to get your per-unit factory overhead cost of $3.

Adjusting Your Selling Price

Calculate your total costs per unit to see if you need to adjust your selling price. Add the direct materials costs, direct labor costs and factory overhead costs, then divide that number by the total number of units produced. For example, say your direct materials and labor costs are $50,000, your factory overhead costs are $20,000 and you produce 50,000 units. Divide $70,000 by 50,000 to get the $1.40 per-unit cost. Your selling price must exceed $1.40 to make a profit on each sale. You can adjust your profit margin by increasing the selling price per unit and decreasing your production costs.