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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:

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

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