UGC NET COMMERCE July 2018 Q14
- Option : C
- Explanation : Operating ratios indicate the percentage of sales that is absorbed to the cost of goods sold and other operating expenses. It is the test of operational efficiency with which the business activities are being carried out. If the ratio is lower, the position is favourable since there is higher operating profit and the management has succeeded in minimising the operating costs. The higher operating ratio is less favourable because it would leave only a smaller margin of operating profit to meet the obligation towards interest, income tax, and dividend. There is no rule of thumb for this ratio, because it varies from firm to firm depending upon the nature of business. While analysing this ratio, it is suggested that the changes in operating ratios over a period of time should be well analysed. The changes in operating expenses can be either within the control of management or beyond the control of management. If the change in operating expense is within the control of management, appropriate steps can be taken to control the same in forthcoming period, based on the results and further probe.
