When budgeting overhead, what is typically determined first in the process?

In the budgeting process for overhead, determining budgeted overhead costs is typically the first step. This is because the overhead costs form the baseline for what needs to be allocated throughout the production process.

Budgeted overhead costs include estimates of all indirect costs related to manufacturing, such as utilities, maintenance, and salaries of supervisory staff. These costs are critical as they directly influence the overall budget and are necessary for calculating the overhead rate that will be applied to direct labor hours or machine hours.

Once the budgeted overhead costs are established, the next steps usually involve determining how these costs will be allocated to products made, which includes calculating the applied overhead rate based on direct labor hours or machine hours. This structured approach ensures that all overhead expenses are accounted for, allowing for accurate product costing and financial planning.

By having a clear understanding of the budgeted overhead costs, managers can effectively plan for profitability and cost control, making this the logical starting point in the budgeting process.