Thursday, July 27, 2017

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