How to Develop Budgeted Fixed Overhead Cost Rates
Manufacturing overhead represents all indirect costs that apply to a company's production process. Fixed overhead costs include production facility property taxes, quality-control personnel salaries and rent or leases for buildings. Companies often apply these costs using a standard budget rate, also called a predetermined overhead rate. Using budgeted costs gives companies an idea of what they can expect to pay to produce products. Standard costing techniques are among the most common allocation methods in production companies.
Other People Are Reading
Instructions
-
-
1
Review the previous year's general ledger. Identify all fixed overhead costs that apply to the production process.
-
2
Add together all the applicable fixed overhead costs. Interview the production managers to determine whether any new fixed overhead costs will occur during the upcoming year. Include these costs in the fixed overhead total.
-
-
3
Review the previous year's production output. Total the production output for each month into a single figure.
-
4
Divide the total planned fixed overhead costs by the total planned production output for the year. This represents the standard fixed overhead cost for each good.
-
5
Allocate the standard fixed overhead cost rate from Step 4 to each produced product.
-
1
Tips & Warnings
A variance analysis typically is necessary to determine whether actual production costs are lower, on target or higher than budgeted costs. Adjustments are necessary to remove the excess cost to the cost of goods account.
