Page 101 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes competition is very rare and as such it is necessary to make calculations at different time periods.
The relationship between cost, revenue and volume (output) is realistic only over narrow ranges
of output and for long ranges. If too many products and too many plants are grouped together
in a productive process, the BEA cannot identify which is good or which is bad, since all are
grouped together. The BEA assumes that profits are the result of output but ignores that other

factors like technological changes, improved management and variations in the proportions of
fi xed factors are also possible for profi ts. In spite of these, BEA is an important tool in decision
making.

Example: From the following information relating to quick standards Ltd., you are
required to fi nd out (i) PV ratio, (ii) break even point, (iii) calculate the volume of sales to earn
profi t of ` 6,000/-
Total Fixed Costs ` 4,500
Total Variable Cost ` 7,500

Total Sales ` 15,000
Solution:

First step to find out the Contribution volume
Sales ` 15,000
Variable Cost ` 7,500

Contribution ` 7,500
Fixed Cost ` 4,500
Profi t ` 3,000
1. Second step to determine the PV ratio
Contribution 7,500
PV ratio = × 100 = × 100 = 50%
Sales 15,000

Third step to find out the Break even sales
Fixed cost 4,500
2. Break even sales = = = 9,000
PV ratio 50%
3. Margin of safety can be found out in two ways

(a) Margin of Safety = Actual sales – Break even sales
= ` 15,000 – ` 9,000 = ` 6,000
Profit ` 3,000
(b) Margin of Safety = = = ` 6,000
PV ratio 50%
4. Sales required to earn profi t = ` 6,000/-
To determine the sales volume to earn desired level of profi t.

Self Assessment

Fill in the blanks:
11. Break even analysis helps in determining the ...................... of output below which it would

not be profitable for a firm to produce.
12. Break even point is the point of ...................... .

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