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 Hours||127.2||151.2||192.0||216.0||686.4|
|Variable Overhead Rate||x$5||x$5||x$5||x$5||x$5|
|Budgeted Variable Overhead||636||756||960||1,080||3,432|
|Budgeted Fixed Overhead||1,645||1,645||1,645||1,645||6,580|
|Includes $540 depreciation in each quarter|