Break Even Chart.

Q79. What is Break Even Chart? What are its uses and limitations?
Ans. The break even chart graphical representation of cost volume profit relationship.

It shows the following:

  1. The profitability of the undertaking at different level of output.
  2.  Break Even Point ( BEP).
  3.  Relationship between marginal cost, fixed expenses and contribution.
  4. Margin of safety.

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Angle of Incidence.

Q78. What is the Angle of Incidence?
Ans. This is the angle at which the total sales line cut the total cost line. In other words it shows the Break Even Point (BEP) and margin of safety position.

Angle of incidence may be of four types:

  1. Low Break Even Point and large angle of incidence.
  2. Low Break Even Point and small angle of incidence.
  3. High Break Even Point and low angle of incidence.
  4. High Break Even Point and high angle of incidence.

Margin Of Safety.

Q77. What is margin of safety? How it can be improved?
Ans. The margin of safety represents the difference between the sales and Break Even Point. The size of margin of safety shows the strength of the business.

It can be improved as follows:

  1. Increase in selling price.
  2. Reduction in fixed expenses.
  3. Reduction in variable expenses.
  4. Increase in sales volume.

Break Even Point.

Q76. What is Break Even Point? What are types of Break Even Point?
Ans. The Break Even Point means the sale value at which there is neither a profit nor a loss. In other words, it is the point where contribution is equal to fixed cost.

Types of Break Even Point:

  1. Cash Break Even Point: While computing the Break Even Point if only cash fixed costs are considered, the Break Even Point so computed is called Cash Break Even Point.
  2. Composite Break Even Point: It is a single Break Even Point in the case of firms manufacturing two or more products. Composite Break Even Point is determined by dividing the total fixed costs by composite P/V ratio.
  3.  Cost Break Even Point: It is a situation under which the costs of operating two alternative plants are equal.

P/V Ratio.

Q75. What is P/V Ratio? How it can be improved? How is the use of P/V ratio?
Ans. Profit Value Ratio(P/V Ratio) is the relationship between the contribution and sales value. It is expressed as a percentage of contribution over sales.
P/V Ratio can be improved:

  1. By reducing variable cost per unit.
  2. By increasing selling per unit.
  3.  By increasing the output of those units having a higher P/V ratio and by reducing the output of those units having a low P/V ratio.

Uses of P/V ratio:

  1.  Determine variable cost for any volume of sales.
  2. Measure the efficiency or to choose a most profitable line.
  3. Determine Break Even Point.

Advantages and Disadvantages of Marginal Costing.

Q74. What is marginal costing? What are the advantages and disadvantages of marginal costing?
Ans. The ascertainment of marginal cost and of the effect on profit of changes volume or type of object by differentiating between fixed cost and variable cost. Stock are valued at variable cost only.

Advantages of Marginal Costing:

  1.  It helps a firm in taking decisions about pricing policy.
  2.  There is no over absorption or under absorption of overheads.
  3. Under marginal costing technique, closing stock are valued at marginal cost which gives the true profit position.
  4.  It helps in caring about break even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company.
  5. Segregation of expenses helps the management to exercise control over expenditure.
  6.  Marginal costing helps the management in taking number of decision.

Disadvantages of Marginal Costing:

  1.  Difficult to classify costs into variable and fixed.
  2. Contribution itself is not a guide unless it is linked with the key factory.
  3. Sales staff may mistake marginal cost for total cost and sell at a price which will result any loss or low profit.
  4. In large contracts, fixed nature should be included in the valuation of work in progress.
  5. Some assumption is not realistic.

Steps For Introducing Of Standard Costing System.

Q72. What are the steps for introducing of standard costing system?
Ans. Steps are:

  1. Study of the technical aspects of the factory viz. Production method, technique, wastage etc.
  2. Review of existing costing system, records and forms.
  3.  Study of organization chart, authority responsibility relationship etc.
  4. Choices of standard to be made viz. basic or current.
  5. Secure cooperation of the factory executives for fixing the quality and efficiency standards.
  6. Study of existing cost policies with regard to the methods of allocation and apportionment of overhead.
  7. Review of budgetary control and internal control procedure.
  8. Preparation of detailed manual with regard to standard for the guidance of the staff.
  9.  Provide training to staff so they properly work as per system.

Disadvantages Of Standard Costing.

Q70. What are the disadvantages of standard costing?


          What are the limitations of standard costing?
Ans. Disadvantages of standard costing are:

  1.  Standards may be either too strict or too liberal.
  2. Standards once fixed rarely hold goods for a long period, they require revision.
  3.  It requires good organization and cooperation from all levels.
  4.  In view of the uncertain economic situation and great fluctuations in prices, sometimes it comes extremely difficult to set up standard cost.