Manufacturing Cost Budget

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on October 1, 2021

The Direct Materials Budget, the direct labor budget, and the manufacturing overhead budget make up the Manufacturing cost Budget. Each of the three budgets is explained in brief below:

Direct Material Budget

The materials required for the production schedule are estimated. Purchases are then made of the materials required depending upon the production cycle. Also, if the materials can be stored, with moderate cost, they can be purchased in large quantities when the prices are reasonable. Normally organizations try to keep reasonable levels of materials to match production requirements.

Direct Labor Budget

In the preparation of the direct labor budget, production requirements are translated into labor requirements. The labor hours required to manufacture the product are estimated from the production budget. The standards hours are calculated from past records or past performance and are then adjusted for set-up time, idle time and other changes that may have taken place.
The Labour Hours are then multiplied by the various hourly labor rate to arrive at the total estimated labour cost.

Manufacturing Overhead Budget

The Manufacturing Overhead budget is made up of three important parts: (i) Indirect Materials, (ii) Indirect labour; and (iii) Indirect expenses like power, depreciation, repairs and maintenance, taxes, insurance, etc.
This budget provides management with ways and means of controlling overhead cost. For example, a small saving in one department, when multiplied for all other departments, may result in a substantial amount of savings for the entire organization. The direct material and direct labour costs are normally fixed in advance and management has not much say in controlling these costs.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

Leave a Comment