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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
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LESSON# 32
BREAKEVEN ANALYSIS ­ CHARTS AND GRAPHS
The conventional break-even chart
The conventional break-even chart plots total costs and total revenues at different output levels
and shows the activity level at which break-even is achieved.
Conventional break-even chart
The chart or graph is constructed as follows:
Plot fixed costs, as a straight line parallel to the horizontal axis
Plot sales revenue and variable costs from the origin
Total costs represent fixed plus variable costs.
The point at which the sales revenue and total cost lines intersect indicates the breakeven level of
output. The amount of profit or loss at any given output can be read off the chart.
By multiplying the sales volume by the unit price at the break-even point the level of revenue
needed to break even can be determined.
The chart is normally drawn up to the budgeted sales volume.
The difference between the budgeted sales volume and break-even sales volume is referred to as
the margin of safety.
Usefulness of charts
The conventional form of break-even charts was described above. Many variations of such charts
exist to illustrate the main relationships of costs, volume and profit.
Unclear or complex charts should, however, be avoided, as a chart which is not easily understood
defeats its own object.
Generally, break-even charts are most useful for the following purposes:
comparing products, time periods or actual outcomes versus planned outcomes
showing the effect of changes in circumstances or to plans
giving a broad picture of events,
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Cost & Management Accounting (MGT-402)
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Contribution break-even charts
A contribution break-even chart is constructed with the variable costs at the foot of the diagram
and the fixed costs shown above the variable cost line.
The total cost line will be in the same position as in the break-even chart illustrated above; but by
using the revised layout it is possible to read off the figures of contribution at various volume
levels, as shown in the following diagram.
Profit-volume chart
A profit-volume chart is a graph which simply depicts the net profit and loss at any given level of
activity.
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Profit
Sales
0
500
Breakeven Point
Loss
1,000
Loss = Fixed cost at zero sales activity
From the above chart the amount of net profit or loss can be read off for any given level of sales
activity, unlike a break-even chart which shows both costs and revenues over a given range of
activity but does not highlight directly the amounts of profits or losses at the various levels.
The points to note in the construction of a profit-volume chart are as follows:
The horizontal axis represents sales (in units or sales value, as appropriate). This is the same as
for a break-even chart.
The vertical axis shows net profit above the horizontal sales axis and net loss below.
When sales are zero, the net loss equals the fixed costs and one extreme of the 'profit-volume'
line is determined. Therefore this is one-point on the graph or chart.
If variable cost per unit and fixed costs in total are both constant throughout the relevant range
of activity under consideration, the profit-volume chart is, depicted by a straight line (as
illustrated above). Therefore, to draw that line it is only necessary to know the profit (or loss)
at one level of sales. The 'profit-volume ' line is then drawn between this point and the one for
zero sales, extended as necessary.
If there are changes in the variable cost per unit or total fixed costs at various activities, it
would be necessary to calculate the profit (or loss) at each point where the cost structure
changes and to plot these on the chart. The 'profit-volume' line will then be a series of straight
lines joining these points together, as shown in the simple illustration below.
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Profit-volume chart (2)
This illustration depicts the situation where the variable cost per unit increases after a certain level
of activity (OA), e.g. because of overtime premiums that are incurred when production (and sales)
exceed a particular level.
Points to note:
 The profit (OP) at sales level OA would be determined and plotted.
 Similarly the profit (OQ) at sales level of OB would be determined and plotted.
 The loss at zero sales activity (= fixed costs) can be plotted.
 The "profit-volume' line is then drawn by joining these points, as illustrated.
As long as we make the assumptions that contribution per unit is constant, and fixed costs do not
change, we can draw straight-line graphs to show profit or costs and revenues at all possible
activity levels.
MULTIPLE CHOICE QUESTIONS
1.  If contribution margin is positive?
(a) Profit will occur.
(b) Both a profit and loss are possible.
(c) Profit will occur if the fixed expenses are greater than the contribution margin.
(d) A loss will occur if the contribution margin is greater than fixed expenses.
2. At the breakeven point:
(a) Profit is Rs. 0.
(b) . Fixed Cost + Variable Cost = Safes
(c) Fixed Cost = Contribution Margin
(d) All of the above
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3.
A completed CVP graph will show that profit or loss at any level of sales is measured by:
(a)
A vertical line between the fixed cost line and the x axis.
(b)
A horizontal line between the revenue line and the y axis.
(c)
A vertical line between the total revenue line and the total expenses line.
(d)
A horizontal line between the total revenue line and the total expenses line.
4.
Contribution margin ratio is:
(a)
Total Contribution Margin / Sales.
(b)
Sales / Contribution Margin per unit,
(c)
Fixed cost / Contribution margin per unit.
(d)
Sales / Variable costs.
5. The impact on net operating income of any given dollar change in total sales can be computed
by applying which ratio to the dollar change?
(a) Profit margin.
(b) Variable cost ratio.
(c) Contribution Margin.
(d) Ratio of Variable to Fixed Expenses.
6. The Hino Corporation has a breakeven point when sales are Rs. 160,000 and variable costs at
that level of sales are Rs. 100,000. How much would contribution margin increase or decrease, if
variable expenses dropped by Rs. 20,000?
(a) 37.5%.
(b) 60%.
(c) 12.5%.
(d) 26%
7.
Which of the following represents the CVP equation?
(a)
Sales = Contribution margin + Fixed expenses + Profits
(b)
Sales = Contribution margin ratio + Fixed expenses + Profits
(c)
Sales = Variable expenses + Fixed expenses + Profits
(d)
Sales = Variable expenses - Fixed expenses + Profits
8.
Margin of Safety is a term best described as the excess of:
(a)
Contribution margin over fixed expenses.
(b)
Total expenses over the breakeven point.
(c)
Sales over the breakeven point.
(d)
Sales over total costs.
Point out which of the following statements are TRUE/FALSE
1.
Cost-volume-profit (CVP) analysis summarizes the effects of change on an organization's
volume of activity on its costs, revenue, and profit.
2. The break-even point is the volume of activity where an organization's revenues and expenses
are equal,
3.
Total contribution margin can be calculated by subtracting total fixed costs from total
revenues.
4. Contribution margin / Sales price per unit = Contribution margin ratio.
5. The sales price of a single unit minus the unit's variable expenses is called the unit contribution
margin-
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6.  The contribution-margin ratio of a firm is determined by dividing the per unit contribution
margin by the per unit sales price.
7.  The safety margin of an enterprise is the difference between the budgeted sales revenue and
the break-even sales revenue-
8. A company's break-even sales revenues are Rs, 400,000, and its contribution margin is 40%. If
fixed costs increase by Rs. 24,000, breakeven sales will increase to Rs. 440,000.
9.  If the total contribution margin at break-even sales is Rs, 45,000, then the fixed costs must
also be Rs. 45,000,
10. If a company sells 50 units of A at Rs. 8 contribution margin and 200 units of B at a Rs. 6
contribution margin, the weighted-average contribution margin is Rs. 7.00.
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Table of Contents:
  1. COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION:COST CLASSIFICATION,
  2. IMPORTANT TERMINOLOGIES:Cost Center, Profit Centre, Differential Cost or Incremental cost
  3. FINANCIAL STATEMENTS:Inventory, Direct Material Consumed, Total Factory Cost
  4. FINANCIAL STATEMENTS:Adjustment in the Entire Production, Adjustment in the Income Statement
  5. PROBLEMS IN PREPARATION OF FINANCIAL STATEMENTS:Gross Profit Margin Rate, Net Profit Ratio
  6. MORE ABOUT PREPARATION OF FINANCIAL STATEMENTS:Conversion Cost
  7. MATERIAL:Inventory, Perpetual Inventory System, Weighted Average Method (W.Avg)
  8. CONTROL OVER MATERIAL:Order Level, Maximum Stock Level, Danger Level
  9. ECONOMIC ORDERING QUANTITY:EOQ Graph, PROBLEMS
  10. ACCOUNTING FOR LOSSES:Spoiled output, Accounting treatment, Inventory Turnover Ratio
  11. LABOR:Direct Labor Cost, Mechanical Methods, MAKING PAYMENTS TO EMPLOYEES
  12. PAYROLL AND INCENTIVES:Systems of Wages, Premium Plans
  13. PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS
  14. LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY OVERHEAD COST
  15. ALLOCATION AND APPORTIONMENT OF FOH COST
  16. FACTORY OVERHEAD COST:Marketing, Research and development
  17. FACTORY OVERHEAD COST:Spending Variance, Capacity/Volume Variance
  18. JOB ORDER COSTING SYSTEM:Direct Materials, Direct Labor, Factory Overhead
  19. PROCESS COSTING SYSTEM:Data Collection, Cost of Completed Output
  20. PROCESS COSTING SYSTEM:Cost of Production Report, Quantity Schedule
  21. PROCESS COSTING SYSTEM:Normal Loss at the End of Process
  22. PROCESS COSTING SYSTEM:PRACTICE QUESTION
  23. PROCESS COSTING SYSTEM:Partially-processed units, Equivalent units
  24. PROCESS COSTING SYSTEM:Weighted average method, Cost of Production Report
  25. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Accounting for joint products
  26. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Problems of common costs
  27. MARGINAL AND ABSORPTION COSTING:Contribution Margin, Marginal cost per unit
  28. MARGINAL AND ABSORPTION COSTING:Contribution and profit
  29. COST VOLUME PROFIT ANALYSIS:Contribution Margin Approach & CVP Analysis
  30. COST VOLUME PROFIT ANALYSIS:Target Contribution Margin
  31. BREAK EVEN ANALYSIS MARGIN OF SAFETY:Margin of Safety (MOS), Using Budget profit
  32. BREAKEVEN ANALYSIS CHARTS AND GRAPHS:Usefulness of charts
  33. WHAT IS A BUDGET?:Budgetary control, Making a Forecast, Preparing budgets
  34. Production & Sales Budget:Rolling budget, Sales budget
  35. Production & Sales Budget:Illustration 1, Production budget
  36. FLEXIBLE BUDGET:Capacity and volume, Theoretical Capacity
  37. FLEXIBLE BUDGET:ANALYSIS OF COST BEHAVIOR, Fixed Expenses
  38. TYPES OF BUDGET:Format of Cash Budget,
  39. Complex Cash Budget & Flexible Budget:Comparing actual with original budget
  40. FLEXIBLE & ZERO BASE BUDGETING:Efficiency Ratio, Performance budgeting
  41. DECISION MAKING IN MANAGEMENT ACCOUNTING:Spare capacity costs, Sunk cost
  42. DECISION MAKING:Size of fund, Income statement
  43. DECISION MAKING:Avoidable Costs, Non-Relevant Variable Costs, Absorbed Overhead
  44. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS
  45. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS:MAKE OR BUY DECISIONS