MANAGEMENT ACCOUNTING
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total cost equals total selling price used in the broader sense It means that the system of analysis which determines the probable profit at any level of production. The break even analysis establishes the relationship of costs, volume and profits.
So this analysis is known as Cost Volume Profit
Analysis. It is an important technique used in profit planning and managerial decision – making. Break-even Chart:Break even analysis is made through graphical charts. Break-even chart indicates approximate profit or loss at different levels of sales volume within a limited range. The break-even charts show fixed and variable costs and sales revenue so that profit of loss at any given level of production or sales can be ascertained. Steps involved in construction of a Break-even Chart :Step - 1:
Select a scale for sales (units) on horizontal axis.
Step – 2:
Select a scale for costs and revenues on vertical axis
Step – 3:
Draw the fixed cost-line parallel to the horizontal axis.
Step – 4:
Draw the total cost line, starting from the point on the vertical axis which represents fixed costs.
Step – 5:
Draw the sales line, starting from the point of origin (Zero) and finishing at point of maximum sales.
Step – 6:
The sales line will cut the total cost line at the point where the total cost equal to total revenues.
Step – 7:
The point of intersection of two lines is called ‘break-even point’. i.e. the point of no profit no loss.
Step – 8:
The lines drawn from intersection to horizontal axis and vertical axis give the sales value and number of units produced at break-even point.
Step – 9:
The loss is shown if the production is less than the break-even point and profit is shown if the production is more than the break-even point.
Step – 10:
The total sales minus break-even sales represent the margin of safety.
Step – 11:
The angle which the sales line makes with total cost line, while intersecting it at break-even point is called ‘angle of incidence’
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