managerial uses of break-even analysis, product mix, make or buy decision, capacity utilization and shut down point.

1. CONCEPTS OF
COST
ACCOUNTING
BY
T. SWETHA & C. SRIKALA
TKR Institute of Management & Science ,
Hyderabad.

2. 1. BREAK-EVEN ANALYSIS
• A break-even analysis is used to determine how much sales volume your
business needs to start making a profit.
• The break-even analysis is especially useful when you're developing a
pricing strategy, either as part of a marketing plan or a business plan.
• In economics & business, specifically cost accounting, the break-even
point (BEP) is the point at which cost or expenses and revenue are
equal : there is no net loss or gain, and one has "broken even"
• Total cost = Total revenue = B.E.P.

3. MANAGERIAL USES OF BREAK-EVEN ANALYSIS.
1) It presents a microscopic picture of the profit structure of a business enterprise.
2) It sharpens the focus on certain leverages which can be operated upon to enhance its
profitability.
3) It is possible for the management to examine the profit vulnerability of a business firm
to the possible changes in business.
4) The analysis is immensely useful for sales prospects, changes in cost structure, etc.
5) It is possible to devise managerial actions to maintain and enhance profitability of the
firm

4. • TOTAL VARIABLE COST:
The product of expected unit sales and variable unit cost.
(Expected Unit Sales* Variable Unit Cost)
• TOTAL FIXED COST:
These costs remain roughly the same regardless of sales/output levels. Examples include: Rent,
Insurance and wages.
• TOTAL COST:
The sum of the fixed cost and total variable cost for any given level of production.
(Fixed cost + Total Variable Cost)
• TOTAL REVENUE:
The product of expected unit sales and unit price.
(Expected Unit Sales * Unit Price)
• PROFIT/LOSS:
The monetary gain or loss resulting from revenues after subtracting all associated costs.
(Total Revenue - Total Costs)

6. 2. PRODUCT MIX
• Product mix, also known as product assortment, refers to the
total number of product lines a company offers to its
customers. For example, your company may sell multiple lines
of products. Your product lines may be fairly similar, such as
dish washing liquid and bar soap, which are both used for
cleaning and use similar technologies. Or your product lines
may be vastly different, such as diapers and razors.
• PRDUCT LINE: It is a group of related products all marketed
under a single brand name that is sold by the same company.

7. Product mix is the full range of offerings that a business sells. This is critical to the ability of the
organization to generate sales. Product mix can refer to both physical products and services of
all types. It can also refer to the mix of features and functions that are available to customers.
The product mix of an entity can be evaluated in terms of the following factors:
• WIDTH: This is the number of product lines being offered to customers.
• LENGTH: This is the total number of products being offered to customers.
• DEPTH: This is the total number of variations in which products are offered.
• CONSISTENCY: This is the extent to which the product lines being offered relate to each
other.
• A business can generally achieve a higher sales level on a per-unit basis if it offers a
broad product mix. For example, a customer that wants to buy software package might
also be interested in add-on software that extends the usability of the basic package. For
this reason, companies tend to increase their product mix over time, to bolster their
growth

9. 3. MAKE OR BUY DECISION
• A make-or-buy decision is an act of choosing between manufacturing a product in-house
or purchasing it from an external supplier. Make-or-buy decisions, like outsourcing decisions, speak to a
comparison of the costs and advantages of producing in-house versus buying it elsewhere.

11. 4. CAPACITY UTILIZATION
• The Capacity utilization rate is the proportion of the
production capacity of a business or economy that is
currently in use.
• For example, when an organization has a capacity utilization
rate of 80%, it means that the firm is currently
Operating at 80% of its theoretical capacity. This information
can be useful for determining how much capacity
Is available to deal with spikes in demand.

12. UTILIZATION RATE
~ The capacity utilization rate measures the proportion of potential economic output that is
actually realized.
~ Displayed as a percentage, the capacity utilization level provide insight into the overall slack
that is in an economy or a firm at a given point in time. The Formula for finding the rate is:
(Actual Output/ Potential Output)X100=Capacity Utilization Rate.
~ The capacity utilization rate is an important operational metric for businesses, and it's also a
key economic indicator when applied to aggregate productive capacity.
~ A company with less than 100% utilization can theoretically increase production without
incurring expensive overhead costs associated with purchasing new equipment or property.
~ Economies with ratios of under 100% can absorb significant increases in production without
pushing past previous highs.
~The concept of capacity utilization is best applied to the production of physical goods, which
are simpler to quantify.

14. 5. PLANT SHUTDOWN DECISION
• SHUTDOWN RULE: A firm will choose to implement a shutdown of
production when the revenue received from the sale of the goods or services
produced cannot even cover the variable costs of production. In that
situation, the firm will experience a higher loss when it produces, compared
to not producing at all.
• Technically, shutdown occurs if average revenue is below average variable
cost at the profit-maximizing positive level of output. Producing anything
would not generate enough revenue to offset the associated variable costs;
producing some output would add further costs in excess of revenues to the
costs inevitably being incurred (the fixed costs). By not producing, the firm
loses only the fixed costs.

15. SHUT DOWN
RULE
• Average Variable Cost (AVC),
Average Total (Fixed plus Variable)
cost (AC),Average Fixed Cost
(AFC), Marginal Cost(MC).The
short-run optimal quantity of
output occurs where marginal cost
intersects marginal revenue.

18. REFERENCES
• www.docity.com
• www.investopedia.com
• www.slideshare.com
• www.smallbusiness.choron.com
• www.wikipedia.org
• www.profprakashsingh.wordpress.com
• www.wallstreetmojo.com
• www.corporatefinanceinstitute.com