Page 65 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Solution:

Net Profi t Ratio = Net Profit × 100 = 30 ,000 × 100 = : 1 1
Sales 30 ,00 ,000

The ratio shows that the company is running on a no profit - no loss state.
!

Caution Standard Norm of the Ratio: Higher the ratio, the better the position of the fi rm

is, which means that the firm earns greater profits out of the sales and vice versa.
4.5.3 Operating Profi t Ratio

The operating ratio is establishing the relationship in between the cost of goods sold and operating
expenses with the total sales volume.

Cost of Goods Sold + Operating Expenses
Operating Ratio = × 100
Net Sales

Example: The cost of goods sold by Mangamal operators is ` 2,000. What will be the
operating ratio of the firm if the operating expenses are ` 50,000 and net sales is that of ` 5,00,000?

What does it mean?
Solution:

Cost of goods sold + Operating expenses , 2000 50 000+ ,
0

Operating Ratio = × 100 = = 12
:
,

Net sales 5 00 000
,
Since the ratio is quite low, this means that the firm is in quite favourable position and thus has

a high margin of operating profi t.
!
Caution Standard norm of the ratio: Lower the ratio, the more favourable and better the
firm’s position is, which highlights the percentage of absorption, cost of goods sold and

operating expenses out of sales and vice versa. The lower ratio leads to a higher margin of
operating profi t.
4.5.4 Return on Assets Ratio
This ratio portrays the relationship in between the earnings and total assets employed in the
business enterprise. It highlights the effective utilization of the assets of the firm through the

determination of return on total assets employed.
Return on Assets = Net Pr ofit After Taxes × 100
Average Total Assets

Example: If one company has an income of ` 1 crore and total assets of ` 10,00,000, what
will be the return on assets if net profit after taxes is ` 500000?

Solution:

Return on Assets = Net Pr ofit After Taxes × 100 = , 5 00 ,000 × 100 = 50%
Average Total Assets , 1 000 0000
,

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