FINANCIAL MGMT. & MGMT. ACCOUNTING 3.
Demonstration of effect of changes in fixed and variable cost:-
212 The effect of
changes in fixed and variables costs at different levels of production or profits can be demonstrated by the graph legibly. The relationship of cost, volume and profit at different levels of activity and varying selling prices is shown through the chart. Thus, it indices the requisites for survival of the company. 4.
Exercising Cost Control :- The break-even chart shows the relative importance of
he fixed cost in the total cost of a product. If the costs are high, it induces management to take measures to control such costs. Thus, it is a managerial tool for control and reduction of costs, elimination of wastage and achieving better efficiency. 5.
Effect of economy and efficiency:-
The Capacity can be utilized to the fullest
possible extent and the economies of scale and capacity utilization can be effected. Comparative plant efficiencies can be studied through the break-even chart. The operational efficiency of a plant is indicated by the angle of incidence formed at the intersection of the total cost line and the sales line. 6.
Helps in forecasting and long term planning:- Break-even analysis is very helpful
for forecasting, long – term planning, growth and stability. LIMITATION OF BREAK-EVEN CHARTS There are certain limitations of break-even charts – They are:1.
Stock changes affect income:The break-even chart depicts the volume of production or sales along the X-axis
and thus ignores the effect of changes in stock volume. As a matter of fact, it is assumed that stock changes will not affect the income. This is not true, since the absorption of fixed costs depends on production and not on sales. 2.
Condition of growth not assured:Condition of growth or expansion in an organization are assumed under break-even
analysis. In actual life of any business organization, the operations undergo a continuous process of growth and expansion. 3.
Fixed costs do not always remain constant:The assumption underlying break-even chart do not normally hold good in every
business concern.
Fixed costs vary and do not remain constant at all levels of production.
They have a tendency to raise to some extent after the production is increased beyond a certain level.
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