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  • Cost Accounting

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    Cyril Scaria
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    Fixed costs are those which do not change with the level of activity. Variable costs change in direct proportion to the level of production. Semi-variable costs have properties of both fixed and variable costs. Break-even point is where Total Revenue equals total costs. This point results in zero profit or in other words the business recovers the variable and fixed costs of doing business at a certain revenue level.

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    Fixed costs are those which do not change with the level of activity. Variable costs change in direct proportion to the level of production. Semi-variable costs have properties of both fixed and variable costs. Break-even point is where Total Revenue equals total costs. This point results in zero profit or in other words the business recovers the variable and fixed costs of doing business at a certain revenue level.

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    11 views10 pages

    Cost Accounting

    Uploaded by

    Cyril Scaria
    Fixed costs are those which do not change with the level of activity. Variable costs change in direct proportion to the level of production. Semi-variable costs have properties of both fixed and variable costs. Break-even point is where Total Revenue equals total costs. This point results in zero profit or in other words the business recovers the variable and fixed costs of doing business at a certain revenue level.

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    Contents

    Classification of Costs Chart showing Break Even Analysis Margin of Safety

    Classification of Costs Fixed, Variable and Semi Variable


    Fixed Costs : Fixed costs are those which do not change with the level of activity within the relevant range. These costs will incur even if no units are produced. Variable Cost : Variable costs change in direct proportion to the level of production. This means that total variable cost increase when more units are produced and decreases when less units are produced. Semi Variable Costs : Semi-variable costs have properties of both fixed and variable costs due to presence of both variable and fixed components in them. An example of semi-variable cost is telephone expenses because it usually consists of a fixed component such as Rental Charges as well as Usage Charges which are variable as these are based on the minutes for which the service is used

    Computation of semivariable cost


    Y = a + Bx
    For example, Suppose that the company expects to produce 800 units and company has to pay a fixed cost of Rs 25,000 and a variable manufacturing cost is Rs 3.00 per unit. The semi variable cost would be calculated as follows: Y = a + bX
    Y = Rs 25,000 + (Rs 3.00 800 units)= Rs 27,400

    Break-Even Analysis is used to calculate the break-even point where total revenue equals total costs. This point results in zero profit or in other words at this point the business recovers the variable and fixed costs of doing business at a certain revenue level. In order to perform Break-Even Analysis the following variables are required:

    Total Revenue (TR) which is calculated as number of products sold times unit price (TR = Unit Price x Units Sold) Total Fixed Costs (TFC) generally this number will not change unless the analysis is for a large range / changes in the revenue Total Variable Cost (TVC) which varies directly with the number of products sold Total Cost (TC) is the sum of TVC and TFC (TC = TFC + TVC ) The Profit (P) is calculated as total revenue minus total cost - P = TR TC

    The Break-Even Point shows the number of units the company must sell in order to break even or generate zero profit.

    The Break-Even Revenue shows the revenue the company must make in order to break even or generate zero profit.

    Margin of Safety
    Margin of safety is the amount by which target (budgeted) or existing sales volume exceeds (or falls short of) the break-even point. Once the break-even sales amount is determined, the margin of safety can be calculated in units or rupees as follows: Margin of Safety = Target/Actual Sales - Break-even Sales

    We can also calculate the margin of safety as the percentage of target sales by using the following formula:
    Margin of Safety = Target/Actual Sales - Break-even Sales x 100% Target/Actual Sales

    Let's take an example of ABC Ltd which produces television sets. Assume that the current sales amount to 25,000 units at the rate of Rs 5 per unit ( Total Revenue Rs 125,000 = 25,000 x Rs 5). The break-even point equals 5,000 units (or Rs 25,000 = 5,000 x Rs 5). ABC Ltd is evaluating a lower level of sales (target sales) of 15,000 units (or Rs 75,000 = 15,000 x Rs5). The margin of safety is calculated as presented below: Margin of Safety = 25,000 - 5,000 = 20,000 (in units)

    Margin of Safety = Rs 125,000 Rs 25,000 = Rs 100,000 (in rupees)


    At 15000 units Margin of Safety = 75,000 - 25,000 x 100% = 66.7% ( percentage) 75,000

    Thank You

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