Overhead to Cost of Sales Ratio in Excel

The overhead to cost of sales ratio is a measure of how efficiently a company manages its operating expenses that are not directly related to the production of goods or services. A low overhead ratio indicates that a company is minimizing its indirect costs and maximizing its profitability. A high overhead ratio suggests that a company is spending too much on overheads and may need to cut costs or increase sales.

Formula:

Components:

1. Overhead Costs: Includes all indirect costs or operating expenses not directly tied to the production of goods or services. Examples of overhead costs may include rent, utilities, salaries of administrative staff, and other general operating expenses.
2. Cost of Goods Sold (COGS): Represents the direct costs associated with the production of goods or services. It includes costs such as raw materials, labor directly involved in production, and manufacturing overhead.

In this article, we will show you how to calculate the overhead to cost of sales ratio in Excel, using a simple example. We will also explain the basic theory behind the ratio, the procedures to follow, and some alternative approaches.

The overhead to cost of sales ratio is a type of efficiency ratio that compares the operating expenses to the cost of goods sold. It shows how much of the sales revenue is consumed by the overhead costs. The lower the ratio, the better, as it means that the company is generating more income from each unit of sales, after deducting the direct costs.

The overhead to cost of sales ratio can be used to evaluate the performance of a company over time, or to compare it with other companies in the same industry. A company with a lower overhead ratio than its competitors may have a competitive advantage, as it can offer lower prices or higher margins. However, the ratio should not be used in isolation, as it does not account for other factors that may affect the profitability, such as the quality of the products or services, the customer satisfaction, the market demand, etc.

The overhead to cost of sales ratio can also be affected by the accounting methods used by the company, such as the inventory valuation method, the depreciation method, the allocation of overheads, etc. Therefore, it is important to use consistent and appropriate methods when calculating the ratio, and to adjust for any differences when comparing with other companies.

Procedures

To calculate the overhead to cost of sales ratio in Excel, we need to follow these steps:

1. Identify the operating expenses and the cost of goods sold from the income statement of the company. If the income statement does not provide a breakdown of the operating expenses, we may need to use other sources, such as the notes to the financial statements, the cash flow statement, or the balance sheet.
2. Enter the operating expenses and the cost of goods sold in separate cells in Excel. For example, we can enter the operating expenses in cell B2 and the cost of goods sold in cell B3.
3. Enter the formula for the overhead to cost of sales ratio in another cell. For example, we can enter the formula =B2/B3 in cell B4. This will divide the operating expenses by the cost of goods sold and return the ratio as a decimal number.
4. Format the cell with the formula as a percentage. To do this, we can select the cell, click on the Home tab, click on the Percentage button in the Number group, and adjust the decimal places as needed. Alternatively, we can use the shortcut Ctrl+Shift+%. This will display the ratio as a percentage, such as 41.67%.
5. Interpret the result. The overhead to cost of sales ratio tells us how much of the cost of goods sold is covered by the operating expenses. For example, a ratio of 41.67% means that for every $1 of cost of goods sold, the company spends $0.4167 on operating expenses. The lower the ratio, the more efficient the company is in managing its overhead costs.

Example

Let’s use an example to illustrate how to calculate the overhead to cost of sales ratio in Excel. Suppose we have the following income statement for a company:

To calculate the overhead to cost of sales ratio, we can follow these steps:

1. Identify the operating expenses and the cost of goods sold from the income statement. In this case, the operating expenses are $10,000 and the cost of goods sold are $25,000.
2. Enter the operating expenses and the cost of goods sold in separate cells in Excel. For example, we can enter the operating expenses in cell B2 and the cost of goods sold in cell B3.
3. Enter the formula for the overhead to cost of sales ratio in another cell. For example, we can enter the formula =B2/B3 in cell B4. This will divide the operating expenses by the cost of goods sold and return the ratio as 0.4.
4. Format the cell with the formula as a percentage. To do this, we can select the cell, click on the Home tab, click on the Percentage button in the Number group, and adjust the decimal places as needed. Alternatively, we can use the shortcut Ctrl+Shift+%. This will display the ratio as 40%.
5. Interpret the result. The overhead to cost of sales ratio tells us how much of the cost of goods sold is covered by the operating expenses. In this case, a ratio of 40% means that for every $1 of cost of goods sold, the company spends $0.4 on operating expenses. This is a relatively low ratio, indicating that the company is efficient in managing its overhead costs.

The following table shows the Excel worksheet with the example: