# Expense Ratio

# 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**

1- Administrative expense ratio formula

2- Operating expense ratio formula

3- Variable expense ratio formula

**Example:**

**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%

### You may also be interested in other articles from “financial statement analysis” chapter:

- Horizontal and Vertical Analysis
- Ratios Analysis
- Horizontal Analysis or Trend Analysis
- Trend Percentage
- Vertical Analysis
- Accounting Ratios Definition, Advantages, Classification and Limitations:
- Gross profit ratio
- Net profit ratio
- Operating ratio
- Expense ratio
- Return on shareholders investment or net worth
- Return on equity capital
- Return on capital employed (ROCE) Ratio
- Dividend yield ratio
- Dividend payout ratio
- Earnings Per Share (EPS) Ratio
- Price earning ratio
- Current ratio
- Liquid/Acid test/Quick ratio
- Inventory/Stock turnover ratio
- Debtors/Receivables turnover ratio
- Average collection period
- Creditors/Payable turnover ratio
- Working capital turnover ratio
- Fixed assets turnover ratio
- Over and under trading
- Debt-to-equity ratio
- Proprietary or Equity ratio
- Ratio of fixed assets to shareholders funds
- Ratio of current assets to shareholders funds
- Interest coverage ratio
- Capital gearing ratio
- Over and under capitalization
- Financial-Accounting- Ratios Formulas
- Limitations of Financial Statement Analysis

### Other Related Accounting Articles:

- Fixed Assets Turnover Ratio
- Operating Ratio
- Current Assets to Proprietor’s Fund Ratio
- Dividend Payout Ratio
- Fixed Assets to Proprietor’s Fund Ratio
- Dividend Yield Ratio
- Return on Equity Capital (ROEC) Ratio
- Debt Service Ratio or Interest Coverage Ratio
- Over and Under Trading
- Proprietary Ratio or Equity Ratio

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