Operating Ratio Formula & Example

Definition: Operating ratio is the ratio of cost of sales plus operating expenses to net turnover. It is an indicator of the operational efficiency of a business, a low operating ratio indicates high operating profit.

Formula:
Operating Ratio = [(Cost of sales + Operating expenses) / Net sales] * 100%

Example 1:
Calculate operating ratio given the following figures:
Cost of sales is $300,000, other operating expenses are $50,000, and net sales is $1,000,000.

Solution:
Operating Ratio = [(300,000 + 50,000) / 1,000,000] * 100% = 35%

Example 2:
The following information relates to Peter Ltd. for the year ended 31 December 2010:
Rental $30,000
Electricity $3,000
Total sales $89,000
Salaries and wages $12,000
Postage $600
Cost of goods sold $9,400
Sales returns $1,000

Calculate the operating ratio.

Solution:
Overhead expenses = Rental + Electricity + Salaries and wages + Postage = 30,000 + 3,000 + 12,000 + 600 = $45,600
Net sales = 89,000 - 1,000 = $88,000

Operating Ratio = [(9,400+ 45,600) / 88,000] * 100% = 62.5%

* Next: Expense Ratio Formula & Example
0 comments: