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Preparing an Overhead Budget for a Small Business

Developing the Operating Budget


In developing the entire operating budget as an example for a small business, we are using a small hypothetical business, Art Craft Pottery, as an example. The following information can be used to develop the overhead budget:


In a real company, management or the financial manager would already know the fixed overhead and the variable overhead rate. These numbers would be constants. As a result, for Art Craft Pottery, we will say that fixed overhead is budgeted at $1,645 per quarter. The variable overhead rate is $5 per direct labor hour. Please note that the variable overhead rate is tied to the previous budget we did - the direct labor budget. You would follow this example when producing the overhead budget for your own company, but you would have to produce the direct labor budget first.


You can now develop an overhead budget. You have the overhead figures that you need plus the budgeted direct labor hours from the direct labor budget. Here is the overhead budget for Art Craft Pottery.

Art Craft Pottery Overhead Budget

Art Craft Pottery Overhead Budget
Budgeted Direct Labor Hours127.2151.2192.0216.0686.4
Variable Overhead Rate x$5x$5x$5x$5x$5
Budgeted Variable Overhead6367569601,0803,432
Budgeted Fixed Overhead1,6451,6451,6451,6456,580
Includes $540 depreciation in each quarter
Total Overhead$2,281$2,401$2,605$2,725$10,012

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