Expense Ratio:
Definition:
Expense ratios indicate the relationship of various expenses to net sales.
The
operating ratio reveals the average total variations in expenses. But some of
the expenses may be increasing while some may be falling. Hence, expense ratios
are calculated by dividing each item of expenses or group of expense with the
net sales to analyze the cause of variation of the operating ratio. The ratio can be calculated for individual items of
expense or a group of items of a particular type of expense like cost of sales
ratio, administrative expense ratio, selling expense ratio, materials consumed
ratio, etc. The lower the operating ratio, the larger is the profitability and
higher the operating ratio, lower is the profitability.
While interpreting expense ratio, it must be remembered
that for a fixed expense like rent, the ratio will fall if the sales increase
and for a variable expense, the ratio in proportion to sales shall remain nearly
the same. Formula of Expense Ratio:
Following formula is used for the calculation
of expense ratio:
[Particular Expense = (Particular expense / Net
sales) × 100 ] Example:
Administrative expenses are $2,500, selling expenses are $3,200 and sales are
$25,00,000.
Calculate expense ratio.
Calculation:
Administrative expenses ratio = (2,500 / 25,00,000) × 100
= 0.1%
Selling expense ratio = (3,200 /
25,00,000) × 100
= 0.128%
You may also be interested in other relevant articles:
Profitability ratios:
Liquidity ratios:
Activity ratios:
Leverage ratios or long term
solvency ratios:
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