5. Definition
The break-even point is the point at which income matches
expenditures. Typically, initial expenditures are high. It takes
time for the income to reach the same level. The break-even
point can apply to a product, an investment, or the entire
company's operations.
7. Costs
Fixed (Indirect/Overheads) – are not influenced
by the amount produced but can change in the long run e.g.,
insurance costs, administration, rent, some types of labour
costs (salaries), depreciation on equipment and machinery
Variable (Direct) – Variable cost directly with the amount
produced, e.g., raw material costs, some direct labour costs,
some direct energy costs.
8. Formula Method for Determining
BEP
BEP in terms of Physical Units
BEP = TFC / P – AVC
Where,
BEP = the break even point
TFC = the total fixed cost
P = the selling price
AVC = the average variable cost
9. PROBLEM
Given the following total cost revenue functions, determine the
BEP:
TFC = Rs.480
AVC = 10 Q
Selling Price = 50 Q (Here, Q is Units of cost sold)
SOLUTION
BEP = TFC / P – AVC
= 480 / 50 – 10
= 480 – 40
BEP = 12 Units.
10. BEP in terms of Sales Value
Formula
1. BEP = TFC / CR
2. CR = TR – TVC / TR
Where,
BEP =the break even point
TFC = the total fixed cost
TVC = the total variable cost
TR = the total revenue
CR = the contribution ratio
11. PROBLEM
A firm incurs fixed cost of Rs. 4000 and variable cost of Rs.
10000 and its sales receipts are Rs. 15000.Determine the BEP.
TR = Rs.15000
TVC= Rs.10000
TFC= Rs.4000
13. The margin of safety
The difference between actual output and the break-even
output is known as the margin of safety
sales
–
–
Break-even Point
=
Margin of safety
14. Assumption
1. Cost can be bifurcated in to variable and fixed components.
2. Fixed cost will remain constant during the relevant volume
range of graph.
3. Variable cost per unit will remain constant during the
relevant volume range of graph.
4. Selling price per unit will remain constant irrespective of the
quantity sold within the relevant range of the graph.
5. In the case of multiproduct companies, sales mix remain
constant.
6. Production and sales volume are equal.
15. LIMITATIONS OF BREAK-EVEN
ANALYSIS
BEA is not an effective tool for long range use as it should
be restricted to short range only.
Selling cost is specially very difficult to handle breakeven
analysis.
The area included in breakeven analysis should be limited as
it leads to bad performance.
Cost in particular period may not be caused entirely by the
output in that period.
In BEA, everything is assumed to be constant, this implies a
static condition, hence it is not suited to a dynamic situation.
16. BEA assumes that profits are the only functions of output
ignoring the patent fact that they are also caused by other
factors.
Many other shortcomings- BEA fails to consider the impact
of
• Technological change.
• Better management.
• Division of labour.
• Improved productivity and such other factors influencing
profits.
17. Uses of BEA
BEA provides microscopic view of profit structure
BEA can be of great help for cost control in business
BEA serves the purpose of profit prediction and tool for profit
making
BEA used for determining the “safety margin” to which firm
can permit decline in sales without causing losses
18. COST CONTROL
*DEFINATION*
“The process or activity on controlling costs associated with
an activity, process or company”.
OR
“The practice of managing and/or reducing business expenses
are known as cost control”.
19. *ABOUT COST CONTROL*
Profit maximisation is the major objective of business firm,
even if the profit is not maximised in long run, the firm must
be able to earn sustained profits.
A planned programme of cost reduction is essential for
effective cost control.
Cost control is not a cost reduction.
There should be a consortium approach, to
achieve a goal of cost minimization.
20. TECHNIQUES OF COST CONTROL
STANDARD COSTING
*DEFINATION*
“A technique of using standard cost for the purpose of cost
control is known as standard costing”
OR
“A management tool used to estimate the overall cost of
production assuming normal operations”.
21. *ABOUT STANDARD COSTING*
Standard costing is formed by collecting all kinds of various
information like material, labour and overhead cost from
various sources.
The actual cost can be ascertained only when the production is
undertaken.
Cost control, right decisions and elimination of inefficiencies
are some of the advantages of standard costing.
22. BUDGETARY CONTROL
*DEFINATION*
“Budget control is that type of control in which, controller
compares actual result with budget data and identify the
difference and corrects the cause of difference”.
*ABOUT BUDGETARY CONTROL*
It clearly defines the area of responsibility required by the
managers of budget centres for achievement of budget targets.
Budget control must be made flexible so that according to
changes we can change our budget.
Budgetary control must be through top level management for
successful budgetary control.
23. CASE STUDY
Read the following case study and calculate the break-even
point:
Jessica wanted to start her own company instead of working
for someone else. She had been thinking about different low-
risk ventures she can start with minimum capital.
She realized that she has always enjoyed making homemade
cakes. Her friends loved the cakes she made for them.
She purchased backing yeast of Rs 2000, grain sugar of Rs
3200 ,Eggs for Rs 260 & Flour for Rs 420
Jessica's rent is 2000, 400 for phone & Internet charges,
Electricity chrgs Rs 500 and sales of cake is Rs 10000
Determine the breakeven point in terms of sales
24. Solution
Formula :-
BEP(Sales)= ____ Fixed Cost ________
Contribution margin ratio
Where contribution = (Selling price – variable
cost)/Selling price
Sales 10000
Variable Cost 5880
(2000+3200+260+420)
Fixed Cost 2900
(2000+400+500)
Contribution Margin ratio is(10000-5880)/10000) = 0.4
BEP = 2900 = Rs.7250
0.4
At the sales value of Rs 7250(BEP),there is no profit no
loss.
