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Expense Ratios:

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Definition and Explanation:

Expense ratios are calculated to ascertain the relationship that exists between operating expenses and volume of sales. Expense ratios are calculated by dividing each item of expense or group of expenses with the net sales so analyze the cause of variation of the operating ratio. It indicates the portion of sales which is consumed by various operating expenses.

Formula:

  • Ratio of material used to sales: (Direct material cost / Net sales) 100
  • Ratio of labor to sales: (Direct labor cost / Net sales) 100
  • Ratio of factory overheads to sales: (Factory expenses / Net sales) 100
  • Ratio of office and administration expenses to sales: (Office and administration expenses / Net sales) 100
  • Ratio of selling and distribution expenses to sales: (Selling and distribution expenses / Net sales) 100

These ratios are expressed in terms of percentage. The total of the above ratios will be equal to the operating ratio.

The total revenue expenditure may be sub-divided into two categories with fixed and variable. In the case of a fixed expense, the ratio will fall with increase in sales and for a variable expense, the ratio in proportion to sales shall nearly remain the same.

Example:

The following is the trading and profit and loss account of a Private Ltd. company for the year ended June 30, 1998.

Details

$

Details

$
Stock in hand 76,250 Sales 5,00,000
Purchases 3,15,250 Stock in hand 98,000
Carriage and freight 2,000    
Wages 5,000    
Gross profit c/d 2,00,000    
 
 
  5,98,500   5,98,500
 
 
Administrative expenses 1,01,000 Gross profit b/d 2,00,000
Finance expenses 7,000 Non-operating incomes:  
Selling and distribution expenses 12,000 Interest on securities 1,500  
Non-operating expenses:   Dividend on shares 3,750  
loss on sale of securities

Provision for legal suit

350

1,650

 

2,000

Profit on sale of shares 750 6,000

 
     
Net profit   84,000    
 
 
  2,06,000   2,06,000
 
 

You are required to calculate:

  • Administration express ratio
  • Finance expenses ratio
  • Selling and distribution expenses ratio
  • Non-operating expenses ratio

Solution:

  • Administration express ratio = (Administration express / Net sales) 100

    = (1,01,000 / 5,00,000) 100

    = 20.2 %
     

  • Finance expenses ratio = (Finance express / Net sales) 100

    = (7,000 / 5,00,000) 100

    = 1.4 %
     

  • Selling and distribution expenses ratio = (Selling and distribution express / Net sales) 100

    = (12,000 / 5,00,000) 100

    = 2.4 %
     

  • Non-operating expenses ratio = (Non-operating ratio / Net sales) 100

    = (2,000 / 5,00,000) 100

    = 0.4 %

More study material from this to
 

More study material from this topic:

Meanings, Nature and Usefulness of Ratios Analysis
Interpretation of Ratios
Important Factors for Understanding Ratios Analysis
Significance and Usefulness Ratios Analysis
Classification of Ratios
Analysis of Short Term Financial Position or Test of Liquidity
Current Ratio
Quick/Acid Test/Liquid Ratio
Absolute Liquid Ratio
Inventory/Stock Turnover Ratio
Debtors / Receivable Turnover Ratio
Creditors / Payables Turnover Ratio
Working Capital Turnover Ratio
Profitability Ratios
Gross Profit Ratio (GP Ratio)
Operating Profit Ratio
Net profit ratio (NP ratio)
Earnings Per Share Ratio
Operating ratio
Expense ratio
Solvency ratios - Test of Long Term Solvency
Debt-equity Ratio
Debt Service Ratio or Interest Coverage Ratio
Fixed Assets Ratio
Debts to Total Funds or Solvency Ratio
Reserves to Capital Ratio
Capital Gearing Ratio
Proprietary Ratio
Accounting Ratios Formulas
Limitations of Ratios Analysis

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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