The level of manufacturing payroll is set. Because this system is based on a one-year time frame, manufacturing labor is considered to be a fixed cost.
The level of the manufacturing work force is not really variable until a time frame longer than one year is adopted.
Insurance and taxes are budgeted,
and so on.
After Step 4 has been performed,
it may be necessary to return to Step 3 and make adjustments to some of the costs that are discretionary in nature.