The formula for the operating expense can be simply expressed as summation of various selling, general and administrative (SG&A) expenses like office staff salaries, sales commissions, promotional & advertising cost, rental expense, utilities, etc. It is also called the operating cost ratio or operating expense ratio. Within a time period inflation, while expenses are increasing, the cost-to-sales ratio may raise as it is more costly to generate sales. Try our corporate solution for free! For instance, when the costs total $30,000 and sales are $60,000, the cost-to-sales ratio will be 50%. An Example of Calculating Operating Profit Margin Ratio . It is a very popular ratio to use in real estate, such as with companies that rent out units. Note that operating expenses only refers to the standard day-to-day costs of running the business – it doesn’t include things like significant capital investments. Operating Ratio = (Cost of Goods Sold + Operating Expenses) / Total Revenue. Operating Expense Ratio. Calculating the percentage of sales to expenses is commonly referred to as the percentage of sales method.This method is used by business owners and employees within a business who create budgets to determine if the ratio of expenses to sales is appropriate. Mathematically, it is represented as, Sales to Administrative Expenses Ratio = Net Sales / General and Administrative Expenses. 50% = $30,000 / $60,000. Operating income = Total revenues – operating expenses. Operating profit ratio establishes a relationship between operating Profit earned and net revenue generated from operations (net sales). operating profit ratio is a type of profitability ratio which is expressed as a percentage.. Net sales include both Cash and Credit Sales, on the other hand, Operating Profit is the net operating profit i.e. Another ratio you can derive from operating costs is the operating expense ratio (OER). The operating ratio formula is the ratio of the company’s operating expenses to net sales, where operating expenses include administrative expenses, selling and distribution expenses, cost of goods sold, salary, rent, other labor costs, depreciation, etc. Operating Ratio = (Operating Expenses+Cost of Goods Sold)/Net Sales = (18575+92761)/121615 =0.914739; Advantages of Operating Ratio. To calculate your Opex-to-Sales ratio, you’ll need to divide your total operating expenses by net sales figures. Relevance and Uses of Operating Ratio Formula. It is important to understand the concept of operating ratio because it is used to evaluate the ability of the company’s management to generate sales while controlling its operating expenses in the process. So imagine that a company earned $552,000 in revenue last year and has $100,000 in OPEX. (212) 419-8286 A low OER means less money from income is being spent on operating expenses. 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