Businesses analyze their financial results continuously. They evaluate their own performance by reading the financial statements. They use management accounting reports to obtain additional details. Business managers often calculate ratios using the numbers reported. These ratios allow the manager to further analyze the financial results. In many of these ratios, the manager calculates the annual indirect overhead to use as the denominator in the ratio. These ratios include understanding the monthly percentage of indirect expenses, individual expenses compared to total indirect expenses and the amount of increase of decrease.
Annual indirect expenses refer to the total manufacturing overhead costs incurred by the company. Direct manufacturing expenses build right into the product cost and include direct materials and direct labor. Indirect costs include all other manufacturing costs, such as property taxes or plant depreciation. The annual indirect costs refer to overhead expenses incurred over a 12-month period.
One reason managers calculate the annual indirect expenses to use as the denominator in a ratio is to analyze how much the indirect expenses increase during those months. Indirect expenses vary throughout the year. Some expenses, such as utility usage, increase during the busy season. The company calculates this by dividing the total indirect expenses for the month by the annual indirect expenses.
Another reason managers calculate the annual indirect expenses to use as the denominator in a ratio is to analyze how much one expense category contributes to the total indirect expenses. Some expenses cost the company more than others. For example, property taxes might cost more than supplies. The company calculates this by dividing the annual cost for a specific expense by the total annual indirect expenses.
Increase Or Decrease
Annual indirect expenses change from year to year, creating another reason managers calculate annual indirect expenses to use as the denominator in a ratio. This ratio allows managers to analyze how much the total overhead expenses increase. The company calculates this by subtracting the previous year’s annual indirect expenses from the current year’s indirect expenses to determine the increase or decrease. The company then divides the increase or decrease by the annual indirect for the previous year.