Expense Ratio

In this article we will discuss how to calculate expense ratio in insurance and total expense ratios meaning with calculation with ratio formula

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:

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:

1. Horizontal and Vertical Analysis
2. Ratios Analysis
3. Horizontal Analysis or Trend Analysis
4. Trend Percentage
5. Vertical Analysis
6. Accounting Ratios Definition, Advantages, Classification and Limitations:
7. Gross profit ratio
8. Net profit ratio
9. Operating ratio
10. Expense ratio
11. Return on shareholders investment or net worth
12. Return on equity capital
13. Return on capital employed (ROCE) Ratio
14. Dividend yield ratio
15. Dividend payout ratio
16. Earnings Per Share (EPS) Ratio
17. Price earning ratio
18. Current ratio
19. Liquid/Acid test/Quick ratio
20. Inventory/Stock turnover ratio
21. Debtors/Receivables turnover ratio
22. Average collection period
23. Creditors/Payable turnover ratio
24. Working capital turnover ratio
25. Fixed assets turnover ratio
26. Over and under trading
27. Debt-to-equity ratio
28. Proprietary or Equity ratio
29. Ratio of fixed assets to shareholders funds
30. Ratio of current assets to shareholders funds
31. Interest coverage ratio
32. Capital gearing ratio
33. Over and under capitalization
34. Financial-Accounting- Ratios Formulas
35. Limitations of Financial Statement Analysis

Other Related Accounting Articles:

• Fixed Assets Turnover Ratio
• Operating Ratio
• Dividend Yield Ratio
• Current Assets to Proprietor’s Fund Ratio
• Return on Equity Capital (ROEC) Ratio
• Dividend Payout Ratio
• Fixed Assets to Proprietor’s Fund Ratio
• Debt Service Ratio or Interest Coverage Ratio
• Proprietary Ratio or Equity Ratio
• Working Capital Turnover Ratio