How to Create a Manufacturing Overhead Budget

Running Head: MANUFACTURING OVERHEAD BUDGET 1 

Manufacturing Overhead Budget 

ACME SPORTING GOODS DIVISION 

MANUFACTURING OVERHEAD BUDGET 

FOR THE YEAR ENDED DECEMBER 31, 2016 

	Q1	Q2	Q3	Q4	Year
DIRECT LABOR HOURS (DLH)	70,000	60,000	50,000	80,000	260,000
VARIABLE COSTS:
Indirect materials ($.80/DLH)	$56,000	$48,000	$40,000	$64,000	$208,000
Indirect labor ($1.20/DLH)	$84,000	$72,000	$60,000	$96,000	$312,000
Maintenance($.50/DLH)	$35,000	$30,000	$25,000	$40,000	$130,000
TOTAL VARIABLE COSTS	$175,000	$150,000	$125,000	$200,000	$650,000
FIXED COSTS:
Supervisory salaries	$42,000	$42,000	$42,000	$42,000	$168,000
Depreciation	$16,000	$16,000	$16,000	$16,000	$64,000
Maintenance	$12,000	$12,000	$12,000	$12,000	$48,000
TOTAL FIXED COSTS	$70,000	$70,000	$70,000	$70,000	$280,000
MANUFACTURING OVERHEAD (MO)	$245,000	$220,000	$195,000	$270,000	$930,000
MANUFACTURING OVERHEAD RATE PER DIRECT LABOR HOUR (MO/DLH)					3.57692308

ACME SPORTING GOODS DIVISION 

MONTHLY OVERHEAD FLEXIBLE BUDGET REPORT 

FOR THE MONTH OF AUGUST 2016 



	AUGUST 2016 BUDGET	AUGUST 2016 ACTUAL	AMOUNT OF VARIANCE	FAVORABLE (OR UNFAVORABLE) VARIANCE
Sales	$142,500	$135,000	$7,500	U
Variable Costs:
Direct materials	$45,000	$41,250	$3,750	F
Direct labor	$30,000	$29,000	$1,000	F
Total Variable Costs	$75,000	$70,250	$4,750	F
Contribution Margin	$67,500	$64,750	$2,750	U
Manufacturing Overhead Costs:
Variable Costs:
Indirect labor	$30,000	$28,000	$2,000	F
Indirect materials	$15,000	$16,200	-$1,200	U
Maintenance	$3,000	$2,800	$200	F
Utilities	$1,800	$1,900	-$100	U
Total Variable Costs	$49,800	$48,900	$900	U
Fixed Costs:
Supervision	$1,200	$1,440	-$240	U
Insurance	$400	$400	$0	F
Property taxes	$600	$600	$0	F
Depreciation	$1,800	$1,860	-$60	U
Total Fixed Costs	$4,000	$4,300	-$300	U
Total Costs	$53,800	$53,200	$600	U
Budgeted Net Income	$13,700	$11,550	$2,150	U



Assumptions made in Completing Manufacturing Overhead Budget 

Analysis of Variance Questions 

In general, this flexible overhead budget used the same cost and selling price assumptions as the original budget. Therefore, fixed and variable costs do not change categories. For instance, the variable amount was derived from the actual level of activity which appears as sales units in the income statement. However, the basic assumption was that there may be changes in the production activities and sales volume. The manufacturing overhead cost was based on the machine hours. Though, in cases where the machine hours ranged between two levels, the average number of hours was used in determining the overhead costs. The variance were either as a result of lower or higher budgeted capacity. 

“ Sales” in Acme’s Monthly Overhead Flexible Budget Report 

The Sales Variance, i.e., by how much were Acme’s August 2016 actual sales favorable or unfavorable to budget. (Sales Volume Variance + Selling Price Variance) 

Sales Variance

$2,375 U

$5118 U

$7,493

U (unfavorable)

The Sales Variance was due to selling fewer units than Acme planned to sell? You can determine this by calculating the Sales Volume Variance. (Actual Units Sold - Budget Units Sold) x Price per Unit 

The budgeted sale volume was 15,000 but the company got an actual sale volume of 14,750 units. The price per unit is equal to (142,500/15,000) = $9.5 

Sales Volume Variance

(14,750-15,000)*9.5

$2,375

U

The Sales Variance was due to selling each unit at a lower price than Acme planned to sell. Determine this by calculating the Selling Price Variance . (Actual Price - Budgeted Price) x Actual Unit Sales 

The actual selling price per unit is equal to (135,000/14,750) = $9.153, the budgeted selling price is $9.5, and the actual sales are 14,750 units. 

Selling Price Variance

($9.153-$9.5)*14,750

$5118

U

“ Variable Costs: Direct Materials” in Acme’s Monthly Overhead Flexible Budget Report: 

Variable Costs:
Direct materials	$750F	$$3,000F	$3,750	F

The Direct Materials Variance, i.e., by how much were Acme’s August 2016. Direct Materials Costs favorable or unfavorable to budget. 

The material cost variance of Acme was $5,868 and since the budgeted sales were lower than the actual sales, the variance is favorable. 

The Direct Materials Variance was due to selling fewer units than Acme 

planned to sell. Determine this by calculating the Direct Materials Quantity Variance. (Standard Quantity – Actual Quantity) × Standard Price. Where SQ= (Actual units produced x Standard quantity of Direct Material per Unit) 

The direct material variance is $ 2300 which are favorable since the variance is negative 

Direct material units	(15,000-14,750)*$3= $750	F

The Direct Materials Variance was due to buying each unit at a higher price than Acme planned to pay. Determine by calculating the Direct Materials Price Variance. (Standard Price – Actual Price) * Actual quantity. SP= $3 and AP==41250/14750 =2.9 

Direct material Cost/units	($3.0-$2.7966)*14,750 = $3000	F

“ Variable Costs: Direct Labor” in Acme’s Monthly Overhead Flexible Budget Report: 

The Direct Labor Variance, i.e., by how much were Acme’s August 2016. Direct Labor Costs favorable or unfavorable to budget. 

Direct labor

$500

$15,045

$15,545

F

The direct labor variance of Acme was $7,000 and since the direct labor rate is favorable and labor efficiency is unfavorable (unfavorable offsets the favorable). 

The Direct Labor Variance was due to selling fewer units than Acme. planned to sell. Determine by calculating the Labor Efficiency Variance. 

LEF = Standard rate * (Actual Hours - Standard hour) 

Standard Labor Hours = 15,000 hours 

Actual Labor Hours = 14,750 hours 

Labor Efficiency Variance

(14,750-15,000)*2 =$500

F

The budgeted labor efficiency variance is calculated using the actual hours and the standard or budgeted rate of direct labor. Actuals hours is 8,000 maximum and standard rate is $2 per hour. 

The Direct Labor Variance was due to paying a lower hourly rate than Acme planned to pay. Determine this by calculating the Direct Labor Rate Variance. 

Calculated as = Actual Hours x Actual Rate - Actual Hours x Standard Rate 

= (Actual Rate – Standard Rate) * Actual hours 

Actual Rate = (29,000/29,500) = 0.98$/h 

Standard Rate = 2$/h 

Actual Hours = 8 h 

Direct labor rate variance

(0.98-2)*14,750 =$15,045

F

The Direct labor rate variance was equal to $15,045 favorable as the budgeted labor rate was higher than actual. 

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