Expense Ratio

Expense ratios are calculated to ascertain the relationship that exists between operating
expenses and volume of sales. Expense ratios are calculated by dividing each item of expense or
group of expenses with the net sales so analyze the cause of variation of the operating ratio. It
indicates the portion of sales which is consumed by various operating expenses.

Formula:

Ratio of material used to sales: (Direct material cost / Net sales) 100
Ratio of labor to sales: (Direct labor cost / Net sales) 100
Ratio of factory overheads to sales: (Factory expenses / Net sales) 100
Ratio of office and administration expenses to sales: (Office and administration
expenses / Net sales) 100
Ratio of selling and distribution expenses to sales: (Selling and distribution expenses
/ Net sales) 100

These ratios are expressed in terms of percentage. The total of the above ratios will be equal to
the operating ratio.
The total revenue expenditure may be sub-divided into two categories with fixed and variable. In
the case of a fixed expense, the ratio will fall with increase in sales and for a variable expense,
the ratio in proportion to sales shall nearly remain the same.