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Fundamentals of accounting
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.

Table 1 Information for Activity 5 Use of ratios
DeptNumber of employees
Production125
Assembly 50
Distribution 25

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

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Answer

Table 2 Calculation needed for Activity 5 Use of ratios
Production(125 / (125 + 50 +25)) x £135,000= £84,375
Assembly (50 / (125 + 50 +25)) x £135,000= £33,750
Distribution (25 / (125 + 50 +25)) x £135,000= £16,875