Importance of Overhead Ratio

Overhead ratio is the ratio that is directly related to the operating expense of the business. Operating expenses are the expenses that occur during the day to day routine of the business. We cannot compare operating expense directly to the operating income of the business as well as the production and manufacturing expense of the goods that are produced by the business.

Example of Overhead Ratio

The examples of operating expense can be given as the advertising expense, rent of the work place or office, fees of the professionals hired for certain purposes, utility bills, insurance expenses, machinery expense and a number of other expenses.

Formula of Overhead Ratio

The formula of overhead ratio includes a number of financial figures such as operating expense, taxable net interest income and the operating income of the business. The formula of overhead ratio can be shown as under:-

Overhead Ratio = Operating Expense/ (Taxable Net Interest Income + Operating Income)

Importance of Overhead Ratio

With the help of overhead ratio companies or businesses can recognize expenses as a percentage of their income. Almost all the companies do their best to keep their operating expense at the lowest level without scarifying their performance and competitiveness within the industry. If a business lowers its operating expense it will have a positive impact on the overhead ratio. However cutting the operating expense does not affect the quality and competitiveness of the business.

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