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# 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

Expense ratio formula can be further categorized as on basis of use

2- Operating expense ratio formula
3- Variable expense ratio formula

## 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%

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