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Fundamentals of accounting

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# 2.6 Ratios

Ratios give exactly the same information as fractions but expressed in a different form. Accountants make extensive use of ratios in assessing the financial performance of an organisation.

A supervisor’s time is spent in the ratio of 3:1 (spoken as ‘three to one’) between Departments A and B. (This may also be described as being ‘in the proportion of 3 to 1.’) Her time is therefore divided: 3 parts in Department A and 1 part in Department B.

There are 4 parts altogether and:

3/4 time is in Department A

1/4 time is in Department B

If her annual salary is £24,000 then this could be divided between the two departments as follows:

Department A 3/4 X £24,000 = £18,000

Department B 1/4 X £24,000 = £6,000

## Activity 5 Use of ratios

A company has three departments that make use of the canteen. Running the canteen costs £135,000 per year and these costs need to be shared out among the three departments on the basis of the number of employees in each department.

 Dept Number of employees Production 125 Assembly 50 Distribution 25

How much should each department be charged for using the canteen?

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