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Introduction to bookkeeping and accounting
Introduction to bookkeeping and accounting

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1.5 Ratios

Ratios give exactly the same information as fractions. 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 (pronounced ‘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 7

A company has three departments who use the canteen. Running the canteen costs £45,000 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
Department Number of employees
Production 125
Assembly 50
Distribution 25

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

Answer

Production

(125 / (125 + 50 + 25) x £45,000 = £28,125)

Assembly

(50 / (125 + 50 + 25) x £45,000 = £11,250)

Distribution

(25 / (125 + 50 + 25) x £45,000 = £5,625)