Expense Ratio Formula & Example

Definition: Expense Ratios show the relationship of various expenses to net sales. It is calculated by dividing a particular expense or group of expense with the net turnover. The lower the expense ratio, the larger is the profitability.

Formula:
Overhead Expense Ratio =  (Overhead expenses / Net sales) * 100%

Example 1:
Calculate expense ratios given the following figures:
Administrative expenses $7,500, selling expenses $8,100 and net sales $100,000.

Solution:
Administrative expenses ratio = (7,500 / 100,000) * 100% = 7.5%
Selling expense ratio = (8,100 / 100,000) * 100% = 8.1%

Example 2:
The following information relates to Jack Ltd. for the year ended 31 December 2010:
Rental expenses $23,000
Electricity $2,000
Advertising $3,500
Total sales $54,500
Rent received $11,000
Salaries $10,000
Postage $500
Interest received $17,000
Sales returns $4,500
Calculate the overhead expenses ratio.

Solution:
Net sales = Total sales - Sales returns = 54,500 - 4,500 = $50,000
Overhead expenses = Rental + Electricity + Advertising + Salaries + Postage = 23,000 + 2,000 + 3,500 + 10,000 + 500 = $39,000

Overhead Expense Ratio = (39,000 / 50,000) * 100% = 78%

* Next: Gross Profit Ratio Formula & Example

Author

Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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