Overhead cost ratio

The overhead cost ratio explains the difference between the gross margin and operating margin.

It shows what proportion of sales is spent on overheads, also called sales, general and administrative costs. These are all operating costs other than the cost of goods sold.

The overhead cost ratio is:

overhead costs ÷sales

The use of the overhead cost ratio is similar to the use of margins. It is used to compare a company to industry norms and to look for trends. In general, it provides part of the breakdown of why profits are changing.

The overhead cost ratio also forms part of the decomposition of the operating margin:

operating margin = gross margin - overhead cost ratio
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