How to Calculate and Budget Manufacturing Overhead
Manufacturing overhead expenses are unavoidable. All businesses must consider these costs in their budgets to ensure financial stability and an efficient production process.
To help your business perform smoothly and efficiently and maintain financial stability, here’s how to calculate and budget for manufacturing overhead.
Calculate Manufacturing Overhead Costs
To properly budget manufacturing overhead for your company, you first have to determine the exact overhead costs for each month.
Manufacturing overhead costs refers to anything that helps the production process run as smoothly as possible. These costs can include wages for machine handlers, quality control inspectors, and other workers that work directly to ensure proper production. It can also refer to the costs of equipment repairs and maintenance. Manufacturing overhead costs can also be facility fees such insurance, utilities, and property taxes.
Note: Manufacturing overhead costs don’t include money spent on direct labor or direct materials for your company.
Calculate Overhead Percentage
Once all monthly manufacturing overhead costs have been calculated, you need to determine the overhead percentage. This indicates the percentage that you’ll need to pay for manufacturing overhead every month.
To do this, take your monthly overhead costs and divide it by your company’s monthly sales. Then multiply it by 100.
For example, if your company has $100,000 in monthly manufacturing overhead and $600,000 in monthly sales, the overhead percentage would be about 17%. This means 17% of your monthly revenue will go toward your company’s overhead costs.
Budgeting for Manufacturing Overhead
With the overhead percentage calculated, you’re ready to develop an overhead budget. This process is simple and can provide great financial benefits for any company.
The best way to budget for manufacturing overhead is to set aside the amount of money needed to cover all overhead costs. The amount should be equal to the overhead percentage calculated from your costs divided by your monthly revenue.
Just remember that manufacturing costs as well as sales can vary from month to month. So always make sure that you keep an eye on both numbers and make adjustments as needed to ensure that your company always has enough for all overhead costs.
In Case of High Overhead Percentage
On top of that, the overhead percentage should always be low. This means that your business is using its resources more efficiently and effectively. So if your overhead percentage is high, you may want to consider improving your production process. For example, investing into energy-efficient manufacturing parts and machinery could help reduce operation costs.
You can also adjust your products’ selling prices. Doing this can bring in more revenue so you can have the additional funds needed to cover high overhead costs.
Manufacturing overhead is a necessary part of running a business. While it can be costly, tracking these expenses and sticking to a proper budget can help you to determine just how efficiently your company is performing and even help reduce overhead costs in the future.
Check out CPV Manufacturing’s blog for more tips.