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