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Dealing with Cost Accounting

You recently read a newspaper article about how the majority of businesses fail in their very first year. To minimize the possibility of this happening to you, you decide to use a breakeven analysis. You know it is a very useful and powerful tool not only for new businesses, but as an ongoing tool for the managers of a firm. At your next management meeting, discuss the following topics:

- At least 3 different applications of breakeven analysis
- The importance of only considering relevant versus irrelevant costs in analysis and decision making, using at least 1 example to demonstrate your point
- The challenge of, and how to handle, the mixed (i.e., semi-fixed or semi-variable) cost category.

Solution Preview

Breakeven is a point of no profit no loss. It is a useful tool of management accounting. It is calculated by following the formula:
Fixed costs/ Contribution Margin per unit.
Contribution margin is the direct margin of the business and fixed costs are the costs which don't change with the change in sales.
1) To understand the level of operations required to achieve profits.
2) To know about margin of safety. Margin of safety is positive if actual sales are greater than the break even. A higher margin ...

Solution Summary

Solution discusses the 3 different applications of breakeven analysis