Overhead Budget

An overhead budget is a financial plan that estimates the overhead costs incurred by a business over a specific period, such as a month, quarter, or year.

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Overhead costs are indirect expenses that are not directly attributable to the production of goods or services but are necessary for the overall operation of the business. Here are the key components and steps involved in preparing an overhead budget:

1. Identify overhead costs: Determine the types of overhead costs that need to be budgeted for, including items such as rent, utilities, depreciation, insurance, property taxes, maintenance, administrative expenses, and other indirect expenses.
2. Review historical data: Gather and review historical financial information to understand past overhead costs and their trends. Analyze previous budgets, actual expenses, and any variances to identify patterns and factors that may influence future overhead costs.
3. Estimate fixed overhead costs: Identify fixed overhead costs that remain constant regardless of the level of production or sales activity. Examples include rent for facilities, insurance premiums, property taxes, and salaries of permanent staff.
4. Calculate variable overhead costs: Determine variable overhead costs that fluctuate with changes in production levels or activity levels. Examples include utilities, maintenance costs, supplies, and other variable expenses directly related to production or operations.
5. Allocate overhead costs: Allocate overhead costs to different cost centers or departments based on appropriate allocation bases, such as square footage, machine hours, labor hours, or production volume. Use cost drivers that reflect the usage or consumption of overhead resources by each cost center.
6. Determine budgeted activity levels: Estimate the level of activity or output expected for each cost center or department during the budget period. This could include factors such as production volume, sales revenue, or other relevant metrics.
7. Calculate total overhead budget: Multiply the budgeted activity levels by the predetermined overhead rates to calculate the total overhead costs for each cost center. Summarize the overhead budgets for all cost centers to determine the total overhead budget for the organization.
8. Review and finalize the budget: Review the overhead budget to ensure accuracy, completeness, and alignment with overall business objectives and financial plans. Obtain approval from relevant stakeholders, such as management or the finance department.
9. Monitor actual performance: Compare actual overhead costs incurred during the budget period with the budgeted amounts. Analyze any variations or discrepancies and take corrective actions as needed to control costs and improve operational efficiency.

By preparing an overhead budget, businesses can effectively plan and manage their indirect expenses, allocate resources efficiently, and make informed decisions to achieve their financial goals while controlling overhead costs.