Manufacturing Cost Budget

Written by True Tamplin, BSc, CEPF®

Updated on December 20, 2022

The manufacturing cost budget consists of the following three budgets:

  • Direct materials budget
  • Direct labor budget
  • Manufacturing overhead budget

Each of these budgets is explained in brief below.

Direct Materials Budget

In this budget, the materials required for the production schedule are estimated. Purchases of the materials required are then made depending upon the production cycle.

Also, if the materials can be stored at a 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

When preparing 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 standard hours are calculated based on past records or past performance, after which they are adjusted for set-up time, idle time, and other changes that may have taken place.

Labor hours are then multiplied by the various hourly labor rates to arrive at the total estimated labor cost.

Manufacturing Overhead Budget

The manufacturing overhead budget consists of three important parts:

  • Indirect materials
  • Indirect labor
  • Indirect expenses (e.g., power, depreciation, repairs, maintenance, taxes, and insurance)

This budget provides management with the ways and means of controlling overhead costs.

For example, a small saving in one department, when multiplied for all other departments, may result in substantial savings across the organization.

Direct materials and direct labor costs are normally fixed in advance, and management cannot do much to control these costs.

Manufacturing Cost Budget FAQs

About the Author

True Tamplin, BSc, CEPF®

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

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, 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, or check out his speaker profile on the CFA Institute website.