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
subdivided 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 
Nonoperating incomes: 

Selling and distribution expenses 
12,000 
Interest on
securities 
1,500 

Nonoperating 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
 Nonoperating 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 %

Nonoperating expenses ratio
= (Nonoperating ratio / Net sales) ×
100
= (2,000 / 5,00,000) ×
100
= 0.4 %
