Moreover, the management has to adopt policies to face the ever growing competition, to develop new markets for its products. When an order is received, production control allots a number to it. Variable costs are costs that vary directly with the number of products produced. If there is keen to undertake vigorous campaign of advertisement. Payment of Wages : Due care should be taken for payment of wages to employees to ensure proper payment i. This facilitates comparison of costs of one period with those relating to a different period in order to evaluate the operating efficiency of each division or segment or product. Break-even analysis can enable the firm to decide whether to make or buy.
The break-even analysis can be used for the following purposes: i Safety Margin: The break-even chart helps the management to know at a glance the profits generated at the various levels of sales. However, certain considerations need to be taken account of in a buying decision, such as i Is the required quality of the product available? Financial loss results from materials stolen, pilfered, spoilage and damage to materials before use, scrap and spoilage during use. Should the firm go in for expansion? Engineering Department: This department helps to maintain control over working conditions, production methods, job performance. The finished goods of first process are passed to the next process, each process merely performs some operation on the material passed from the earlier process. Break-Even Point : The break-even point B. Time-Keeping Department: The function of this department is to maintain the exact time for which each worker has worked.
This is the number of widgets that have to be sold at a selling price of Rs. Whatever method is followed, sufficient supply of raw materials should be assured to meet production needs. This type of cost tends to vary in direct proportion to changes in the volume of output. This is also known as no-profit no-loss point. Sales Price Projected or current price of the unit on which it is sold.
Usually, the Break Even Point is the number of units you have to sell or the total amount of sales required to cover your costs. Notes on Motor Transport Costing: In motor transport undertaking most of the data required for computation of cost and cost control purpose are obtained from Daily Log Book. Where materials are not systematically controlled, excess stocks of some items are likely to occur as a result of which unnecessary tying up of capital and loss through obsolescence and deterioration take place. This is the number of products that have to be sold at a selling price of 12. Audit fees, legal charges and bank charges. These techniques will differ in terms of capacity and costs.
It presents income statements showing the financial result of the business for a particular financial year and a Balance Sheet on a specific date to exhibit the state of affairs of a business unit. When break-even analysis is based on accounting data, as it usually happens, it may suffer from various limitations of such data as neglect of imputed costs, arbitrary depreciation estimates and inappropriate allocation of overheads. A break even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs Fixed and Variable Costs Fixed and variable costs are important in management accounting and financial analysis. Limitations : We may now mention some important limitations which ought to be kept in mind while using break-even analysis: 1. This is because changes in selling costs are a cause and not a result of changes in output and sales.
The breakeven analysis is especially useful when you're developing a pricing strategy, either as part of a marketing plan or a business plan. The indirect costs or overhead costs would be the costs of running the store. Need for distinguishing between direct and indirect labour : The distinction between direct and indirect labour is essential from costing point of view for the following reasons: a The distinction between direct and indirect labour is important for calculating labour cost accurately which provides a basis for labour control; b It facilitates the measurement of labour efficiency; c Such distinction helps allocation of overheads; d Introduction of incentive schemes for payment of wages becomes feasible and easy; and e It also helps to estimate total labour cost. It may range from one or two product lines to a combination of several product lines or groups. The variable cost is Rs. Sunk fixed costs are the expenditures previously made but from which benefits still remain to be obtained e.
For example, for low levels of output, some conventional methods may be most probable as they require minimum fixed cost. The depreciation, investment allowance reserve and other provision of the cost items should be excluded but at the same time the repayment of installment should be added to fixed cost. For these purposes, we need Cost Accounting. Materials control consists of controls at two levels: i Quantity controls and ii Financial controls. Here again the break-even point would be where the contribution margin sales value—variable costs would be equal to fixed costs.
A specific contract becomes the cost unit. However, as the scale of the business grows e. The costs of buying umbrellas are variable costs. There are three major problems that involve the preparation of payrolls: a Allocating labour costs to products, departments; b Accurate computation of earnings and prompt payment to individual employees; and c Computing and remitting withholdings to proper authorities like government, local authority etc. Therefore, the total revenue is increasing proportionately to the output. Theft, breakage, deterioration, and the use of excessive floor space can be reduced to a minimum by proper controls. Behaviour-Wise classification : Overhead costs can be classified into: a Fixed; b Variable; and c Semi-variable costs.
There are certain types of Break-Even Charts which are yet to be discussed and which are used for various purposes. Cost Accounting largely uses data about production, sales, wages, overheads. The product mix is the full list of products offered for sale by a Company. Efficient material control cuts out losses and forms of wastes. It can be sound and useful only if the firm in question maintains a good accounting system. It is a method of costing under which costs are determined after they have been incurred.
Unit Price : The amount of money charged to the customer for each unit of a product or service. Matching cost with output imposes another limitation on break-even analysis. Salaries, overtime, bonus of office staff, printing and stationery used in the office. As a result, there occurs a difference between profit shown by Cost accounting and that of financial accounting. In other words, fixed overhead is not allocated to cost units. From this point of view, it is similar to opportunity cost. The functions of a payroll department is an intermediary function between the timekeeping and the cost accounting departments.