Page 205 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes
!
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.
11.6.4 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.
Net Profit After Taxes
Return on Assets = × 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 ` 5,00,000?

Solution:

Net Profit After Taxes 5,00,000
Return on Assets = × = 100 × = 100 50%
Average Total Assets 1,00,0000
!
Caution Standard norm of the ratio:

Higher the ratio illustrates that the firm has greater effectiveness in the utilization of assets,

means greater profits reaped by the total assets and vice versa.
11.6.5 Return on Capital Employed

The ratio illustrates that how much return is earned in the form of Net profit after taxes out of the
total capital employed. The capital employed is nothing but the combination of both non current
liabilities and owners’ equity. The ratio expresses the relationship in between the total earnings
after taxation and the total volume of capital employed.

Net Profit After Taxes
Return on Total Capital Employed = × 100
Total Capital Employed
!

Caution Standard norm of the ratio:
Higher the ratio is better the utilization of the long term funds raised under the capital
structure means that greater profits are earned out of the total capital employed.

Example: In the previous example, if the total capital employed is worth ` 25,00,000,
what is the return on total capital employed?
Solution:
Net Profit After Taxes 5,00,000
Return on Total Capital Employed = × = 100 × = 100 20%
Total Capital Employed 25,00,000

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