Page 89 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 4.10 Review Questions

1. What do you mean by break-even analysis? What are its assumptions?
2. Break-even analysis assumes that variable costs and revenues are linear and that fixed
costs are fixed. Briefly explain why these assumptions may not be realistic.
3. Define marginal cost and marginal costing. How are variable costs and fixed costs treated
in marginal costing?

4. Discuss the importance of breakeven point, margin of safety, contribution and profit-
volume ratio in relation to marginal costing.
5. The size of the margin of safety is an extremely valuable guide to the strength of the
business. Discuss the possible ways to rectify the position when the margin of safety is
unsatisfactory.
6. What are the various applications of the break-even chart? Enumerate the various criticism
usually put up against break-even charts.

7. Draw a break-even chart with few illustration figures. Explain the cost, volume profit
relationship. How would a change in the selling price affect the above?
8. What is a break-even chart? What are its uses and limitations?

9. “The break-even concept is fundamentally a static analysis.” Discuss the statement and
explain the limitations of the concept.
10. What conclusions can be drawn from the position of the break-even point and the angle of
incidence in a break-even chart?
11. “The effect of reduction in sale price is to reduce the P/V ratio, to raise the break-even
point and to shorten the margin of safety.” Explain this statement with the help of a
numerical example.
12. “The technique of marginal cost can be valuable aid to management.” Discuss this statement
and give your views.
13. The effect of increase in sale price is to increase the P/V ratio, to bring down the break-
even point and to widen the margin of safety.” Discuss.
14. “As a result of calculating break-even-points, accountants have come to realise that many
variable facts, all essential for operating a business enterprise, can emerge from the
exercise.” Comment and mention some of the typical problems which may be solved by
break-even analysis.
15. It is often complained that conventional break-even chart is not of much practical use since
it is based on a number of limitations, too simple to be true in real business situation.
What are those and what modifications, if any, would you suggest to compensate these?
Answers: Self Assessment

1. Decisions 2. Profit
3. Volume 4. Fluctuations
5. fixed cost 6. Contribution
7. Marginal 8. cost-volume-profit

9. cost 10. Break-even point

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