Cost and management accounting concept Break even analysis
The success of a business measured in terms of the profit.
The profit of any firm depends of three elements namely cost of production,
setting price, volume of sales.
Cost
determining the selling price. The selling price effects the volume of sales
influencing the volume of production. This volume of production effects the
cost these analysis of relation between cost volume and profit helps the mgt
for profit planning.
The study
of cost volume profit analysis is popularly known as break even analysis. It is
an extention of marginal costing principles. The C.V.P analysis is a mgt for
profit planning. Break even is used in to senses namely
Narrow
Broad
In the
broad sense it means finding break even points. That is no profit no lose
point. At break even point total sales are equal to total lost. In a broad
sense break even analysis refer to the relationship between cost volume profit
different levels of sales or operations.
1)Determine the amount of fixed cost from the following
particular.
Sales
= 200000 /-
Variable
cost = 40000/-
Profit
= 30000/-
Sol: contribution
= sales – variable cost
C = 200000-40000
Contribution = 160000
Fixed
cost = contribution-profit
= 160000-30000
= 130000
2)Determine the amount of fixed cost
from the given particulars
Sales = 500000
Variable
cost = 60000
Profit = 25000
Sol:
Contribution = sales-variable cost
C = 500000-60000
=
440000
Fixed
cost = contribution-profit
=
440000-25000
Fixed
cost = 415000
3)Find out the contribution of PV
ratio
Variable
cost per unit – 40/-
Selling
price per unit – 80/-
Fixed
expenses – 200000/-
Out
put – 10000 units
Contribution =
sales – variable cost
=
80-40
=
40
Total contribution = contribution
per unit × out put
= 40 × 10000
= 400000
Calculation of PV ratio:
PV
ratio = contribution / sales ×100
=
40/80×100
=400/80
=
50 units
4) sales – 100000/-
Profit – 10000/-
Variable cost – 70% on sales
Find out PV ration fixed cost and
sales volume to earn a profit of 40000
Sol:
variable cost = 100000
× 70 / 100
=
70000
Contribution = sales – variable cost
= 100000-70000
=
30000
Fixed cost = contribution - profit
=
30000 – 1000
= 20000
PV
ratio = contribution/sales × 100
= 30000
/ 100000 × 100
= 30 %
Sales
volume = fixed cost + desired profit /PV ratio
= 20000 + 40000 / 30%
= 200000
Cost volume profit analysis:
CVP
analysis is a mgt accounting tool to be show the relationship between the
ingredients profit planning. When volume of output increases unit cost of
production decreases and vice-versa because the fixed cost remains un effected.
When the output increases the fixed cost per unit decreases. There fore the
profit will be made when sales price remains constant. Generally cost effects
to profit. It is those volume which is perhaps the largest single factor which
influence.
Importance of CVP analysis:
The study
of CVP analysis. It is very significant for the mgt. it assest the mgt the
profit planning, cost control and decision. Mgt apply CPV analysis to get the
ensure to the following position
●
What
should be the sales level to earn a desire profit ?
Mechanics of break even analysis:
The
different mechanics of BEA are
Break even
point
Break even
chart
Break even point:
A business
is said to be break even when it total sales are equal to total cost. It is a
point of no profit & no loss. B.E.P can be calculated in units or invalid.
The BEP can be determine by the following methods.
Algebric
formula method
graphic or
chart method
Algebraic formula method:
●
BEP
in units
●
BEP
in terms of budget of money values
●
BEP
as a percentage of estimated capacity
B.E.P in units:
BEP in units
= fixed cost / selling price – variable cost
(Per unit) (per unit)
(or)
BEP in units
= fixed cost / contribution per unit
BEP interms of budget or interms of money value:
BEP(sales) =
BEP in units × selling price per unit
(Or)
BEP(sales) =
total fixed cost + selling price per unit
Contribution
per unit
BEP in rupees
= fixed cost ×sales sales – variable
cost
(or)
BEP in rupees
= fixed cost PV ratio
B.E chart of graphical method:
Break even
chart is a presentation of marginal costing of data. If the break even point is
shown on the graph paper. It will assume the name of break even chart. Break
even chart following information.
●
Fixed
cost
●
Variable
cost
●
Total
cost
●
Profit
●
Marginal
of safety
●
Break
even point
y
11
10
cost 9
& 8
sales 7 sales
6
5 Break even point total cost
4
3 angle
of incidence
2
50% capacity
1
0 10 20 30 40 50 60 70 80 90 x
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