Overhead Ratio

The Overhead Ratio shows the proportion of operating expenses to total income that cannot be used for production of goods and services.  The operating expenses include advertising, office rent, utilities, insurance, etc.

Overhead Ratio

The Overhead Ratio shows the proportion of operating expenses to total income that cannot be used for production of goods and services.  The operating expenses include advertising, office rent, professional fees, utilities, insurance, machinery maintenance, depreciation or plants or machinery, etc.

 

Overhead Ratio Formula

The Overhead Ratio is the ratio of operating expenses to the sum of taxable equivalent net interest income and other operating income. Operating expenses are the day to day expenses of a business that can include rent, utilities and others. Operating income is the company’s earning capacity from the manufacture of goods and services.



Overhead Ratio Interpretation

In general, a company strives to achieve the lowest operating expenses possible without sacrificing its goods and/or services or competitiveness within the industry. Cutting expenses has a positive effect on the overhead ratio; however, a company must balance these cuts with maintaining the quality of business.



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