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Evaluate the reliability of break-even analysis in estimating budgeted activity levels for selected organisation

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Introduction

Asid Ashraf Unit 7 Management Accounting D1: Evaluate the reliability of break-even analysis in estimating budgeted activity levels for selected organisation As I have already summarised the breakeven point is the point at which cost or expenses and revenue are equal: there is no net loss or gain, and one has broken even. [Selling price-variable costs=contribution] [Fixed costs/contribution=breakeven point]So in your businesses scenario it is, the selling price £15 minus your variable costs £12 which equals £3. This then leaves you with your fixed costs which are 11,500 divided by the contribution which £3 is leaving you with a total breakeven point of, 3833.33. First of all, production managers like Mr Jones and management accountants need to have a clear understanding of break-even analysis. This analysis is used as a general guideline for business decision making and is important for a number of reasons, including the ability to forecast the future cost and revenues and determine whether the business is making profit or loss, and also be able to develop a pricing strategy. The break-even analysis is based on marginal costing. The break-even analysis is based on forecasting and has a certain limitations which should be considered. ...read more.

Middle

There is no significant change in the inventory levels during the period under review. Stated in another way, production volume is assumed to be almost (if not exactly) equal to the sales volume, which causes an immaterial (or none at all) difference between the beginning and ending inventories. Other assumptions which have already been discussed in the preceding numbers are again credited and highlighted here as follows: Unit selling price will remain constant. Unit variable cost will not change. (This may include prices of the factors of production like material costs, labour costs etc.) There will be no change in efficiency and productivity. The design of the product will not change. (A change in the design of the product may bring about a change in production costs, selling price and production volume. Contribution and overheads behaviour: Overheads, also known as indirect costs, are ?costs that are incurred by an organisation that cannot be distinctly attributed to a cost object? i.e. something for which a cost is required. It is important for organisations to cover all costs that it creates; accounting for overheads has become more important in modern times as it takes up a larger percentage of the costs an organisation implicates. ...read more.

Conclusion

Inflation is an important factor that affects the values resulting from historical cost accounting; as general prices rises historical values will hold no resemblance to current values and hence an overstatement is made when measuring income. In relation to the balance sheet, an overstatement in income will result in an over optimistic profit level, this will also be reflected in the profit and loss accounts. Interest rates: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is sometimes known as the "lease rate". And a rise in interest rates will make it more expensive for a business to service its own debts, adding to the costs of the business. At the same time, the business's total revenue may be driven down because demand will have been affected by the interest rate rise. Reference: http://www.investorwords.com/2539/interest_rate.html ...read more.

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