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 %
|
