Budgeting and Deviation Analysis of General Manufacturing Costs

Posted on Jan 8, 2025 in Modern Languages and Management

Forms to Budget the General Manufacturing Costs (GMC)

There are three ways to budget the GMC:

  1. Unit Budget: This involves establishing a budget for manufacturing overhead recorded for each product or for each type of product. This way, you get the budget of GMC for the manufacturing order simply because of its composition.
  2. Individual Budget: This consists of performing a budget of GMC for each particular production order.
  3. Joint or Global Budget: In this case, there is a budget of GMC for the entire company and for a determined period. Below, this budget is split as a function of the frequency of accounting costs. Thus, we budget for winning the GMC each period under analysis by the accounting system. Finally, these are charged to the various GMC budgeted production orders obtained during that period, according to the key distribution that has been described.

Comparison of Actual and Budgeted GMC

At the end of the calculation period, the actual GMC will be known and compared with the budgeted GMC. The differences and deviations that arise can be given a double accounting treatment (depending on the amount and origin):

  • Take directly to an account of the results period. Therefore, these deviations are to be supported only by the production sold.
  • Rectify the cost or the margin of each production order as a function of its state of:
    1. Completed and sold: it is rectified in the margin.
    2. Completed and unsold: correcting the cost.
    3. Unfinished: the cost to rectify them.

The Decision to Give One or Another Treatment

The decision to give one or another treatment will depend on its size and the source of the deviation:

  • If you are due to normal or ordinary causes of the production process, the most appropriate treatment is to rectify the costs or margins, according to the state of the production order.
  • On the contrary, if due to special causes, it is more reasonable that they were treated more as a result of the exercise. Therefore, to be supported only by the production sold.

In this regard, and to differentiate it from a deviation is due to normal causes and partly due to extraordinary causes, establishes the limits of tolerance.

Types of Deviations

Deviations can be of two types:

  1. Subapplications: These occur when actual GMC are higher than budgeted GMC. That is, we have spent more than we estimated at the beginning of the period. Therefore, these deviations will increase the cost or reduce the scope of each production order, as appropriate.
  2. Overapplications: These are produced when the actual GMC is less than the budgeted GMC. Therefore, the cost will reduce or increase the margin, as the case.

Comparison Between Actual and Budgeted GMC

Comparison between actual and budgeted GMC can be done in two ways:

  1. At the global level: that is, comparing the total amount of real GMC with the total amount of budgeted GMC. Thus, we obtain a global deviation, to be distributed among the various production orders using a distribution key.
  2. At the individual level: In this case, comparing the costs charged to each production order (budgeted and actual), obtaining an individual deviation for each period. The sum of these individual deviations will be given the total deviation on actual manufacturing overhead.