Page 77 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes (ii) The margin of safety and the angle of incidence,
(iii) The inter relationship between different costs of production,
(iv) The sales value and break-even point, and
(v) The amount of contribution.

At different activity levels, the interaction of volume, selling price, variable costs and fixed
costs, the relevant variable and their impact upon profit are considered simultaneously.

Did u know? The most important use of the break-even chart is the ascertainment of a
break-even point from the chart, which is a valuable guide to the management.

4.6.1 Assumption of Break-Even Chart

Following are the assumptions of break-even chart:
(i) Costs can be classified into fixed and variable costs,
(ii) Fixed costs will remain constant and will not change with the change in level of output,

(iii) Variable costs will fluctuate in the same proportion in which the volume of output varies,
(iv) The number of units produced and sold will be the same so that there is no opening or
closing stock,

(v) Selling price will remain constant irrespective of change in volume of production,
(vi) There is only one product or in the case of many products, product mix will remain
unchanged, and

(vii) There will be no change in operating efficiency.
4.6.2 Advantages and Disadvantages of Break-Even Chart

Following are the main advantages and disadvantages of break-even chart:
Advantages
(i) The chart is very useful for forecasting costs and profits at various levels of sales,
(ii) A break-even chart is useful for studying the relationship of cost, volume and profit. The
chart is very useful for taking managerial decisions,
(iii) A break-even chart is a tool for cost control because it shows the relative importance of the
fixed cost and the variable cost,
(iv) Profitability of various products can be compared with the help of break-even chart,
(v) It is helpful in knowing the effect of increase or reduction in selling price,
(vi) Profitability of various products can be studied with the help of break-even chart and a
most profitable product mix can be adopted. Profits at different levels of activity can also
be ascertained,

(vii) Information provided by the break-even chart can be understood by the management
more easily than contained in the profit and loss account and the cost statements because
a break-even chart is the simple presentation of cost, volume and profit of the company,
and

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