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Theory Of Cost And Break Even Analysis Pdf

theory of cost and break even analysis pdf

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CVP analysis requires that all the company's costs, including manufacturing, selling, and administrative costs, be identified as variable or fixed. Key calculations when using CVP analysis are the contribution margin and the contribution margin ratio.

Break-even (economics)

Break- Even point is a very significant concept in Economics and business, especially in Cost Accounting. Break- Even point is a point where the cost of production and the revenue from sales are exactly equal to each other; which means that the firm has neither made profits nor has incurred any losses. The Break- Even Analysis is also known as the Cost- Volume- Profit Analysis and is used to study the relationship between total cost, total revenue, profits and losses. It also helps to determine that level of output which is required to cover the operating costs of a business. Break- Even analysis is a concept used very widely in the production management and costing. It is an analytical tool which helps the firm to identify that level of sale where it will cover its cost of production.

Operations: Introduction to Break-even Analysis

The Break-even analysis or cost-volume-profit analysis c-v-p analysis helps in finding out the relationship of costs and revenues to output. It enables the financial manager to study the general effect of the level of output upon income and expenses and, therefore, upon profits. This analysis is usually presented on a break-even chart. It helps in understanding the behaviour of profits in relation to output. Such an understanding, among other things, is significant in planning the financial structure of a company. There are two elements to consider the level of the break-even point and the rapidity with which profits change in relation to output. P analysis, break-even analysis and profit-graphs are interchangeable words.


Fixed costs are costs that do not vary with output. No matter how much is made or how little is sold, fixed costs still have to be paid. Variable costs.


Break-even Analysis

Chapter 15 – Cost-volume Profit (CVP) Analysis and Break-Even Point

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The break-even point BEP in economics , business —and specifically cost accounting —is the point at which total cost and total revenue are equal, i. There is no net loss or gain, and one has "broken even", though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit or loss.

Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are "variable" costs that change when the production output changes and those that are "fixed" costs not directly related to the volume of production. Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss the "break-even point". In its simplest form, the break-even chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income or sales, revenue with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point" and is represented on the chart below by the intersection of the two lines:. In the diagram above, the line OA represents the variation of income at varying levels of production activity "output". OB represents the total fixed costs in the business.


The break–even theory is based on the fact that there is a minimum production level at which a venture neither make profit nor loss. This level is called the break–even point (BEP). The total cost of operations is equal to the total revenue earned at this point. The total cost is made up of fixed and variable costs.


Cost-Volume-Profit Analysis

In managerial economics another area which is of great importance is cost of production. The cost which a firm incurs in the process of production of its goods and services is an important variable for decision making. Total cost together with total revenue determines the profit level of a business. In order to maximize profits a firm endeavors to increase its revenue and lower its costs. Costs play a very important role in managerial decisions especially when a selection between alternative courses of action is required. It helps in specifying various alternatives in terms of their quantitative values. Future costs are those costs that are likely to be incurred in future periods.

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The below mentioned article provides a complete overview on Break-Even Analysis. The break-even point refers to the level of output at which total revenue equals total cost. Management is no doubt interested in this level of output. Therefore, the primary objective of using break-even charts as an analytical device is to study the effects of changes in output and sales on total revenue, total cost, and ultimately on total profit.

However, business decisions are generally taken on the basis of money values of the inputs and outputs. Inputs multiplied by their respective prices and added together give the money value of the inputs, i. An opportunity to make income is lost because of scarcity of resources.

CVP analysis looks at the effect of sales volume variations on costs and operating profit. The analysis is based on the classification of expenses as variable expenses that vary in direct proportion to sales volume or fixed expenses that remain unchanged over the long term, irrespective of the sales volume. Accordingly, operating income is defined as follows:. A CVP analysis is used to determine the sales volume required to achieve a specified profit level. Therefore, the analysis reveals the break-e ven point where the sales volume yields a net operating income of zero and the sales cutoff amount that generates the first dollar of profit.

Как он и подозревал, надпись была сделана не по-английски.

1 Comments

  1. Paris P.

    24.04.2021 at 12:56
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