Three manufacturing overhead costs you must include in your company budget: How it's done
If your company is a manufacturer, your budget will include various elements that you won't find in a regular budget. And this includes overhead costs.
These costs are tricky to account for, so here's what you should know about them...
How to account for manufacturing costs in your compay budget
Since manufacturing costs are indirect costs, you can't match them directly to specific jobs or processes.
But, if you don't account for these in your budget, you'll end up pricing goods incorrectly and running at a lower profit than expected.
This a situation that happens often, So to keep control of these costs, you need a manufacturing overhead budget.
Here are the three building blocks of manufacturing costs and how they fit into your company budget.
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The three building blocks of manufacturing costs
Manufacturing cost # 1: Direct material
Direct material becomes part of the finished product. It's the raw material you use in your manufacturing processes. You'll account for these if it's possible and worth the effort to keep track of them on a per product basis. Sometimes they're such seemingly insignificant components that they're not worth recording as direct material (E.g.: The cost of glue used in the manufacturing of a cupboard.)
Manufacturing cost # 2: Direct labour
Direct labour includes people who are directly involved in making the product. They contribute the labour that becomes part of the finished product – if it's possible to keep track of their labour on a per product basis, a Manufacturing overhead budget may even make it easier to track. (E.g.: The cost to hire a supervisor to look after your manufacturing process.)
Manufacturing cost # 3: Overhead costs
Overhead costs are the indirect labour and raw material costs you can't directly match to a job, process or operation or aren't worth the effort to track per product. These costs could either be fixed or variable depending on the nature of the business.
As a final note, you should make a clear distinction between manufacturing overhead costs and overhead costs since they're not necessarily the same. Either way, you have to account for both in your company budget.