Railway Accounts Department Examinations

Showing posts with label BEP. Show all posts
Showing posts with label BEP. Show all posts

Tuesday, April 20, 2021

Fixed Cost and its importance in BEP

 

Fixed Cost & its importance in BEP

 

·         Meaning:  A cost does not change with an increase or decrease in the Goods produced.

 

·         In General, companies can have two types of costs, i.e., Fixed Costs and Variable Costs.

 

·         Also called as Indirect cost or Overhead costs.

 

·         Examples:  Lease Rentals, Salaries, Insurance, Taxes, Interest expense, Depreciation etc.

 

·         All Sunk costs are Fixed Costs.  But, all fixed costs are not sunk costs..

 

·         Sunk cost: Money that has already been spent and which cannot be recovered.  Examples are Machinery Cost, Lease expense, etc.

 

·         A fixed cost per unit is always variable; Whereas Variable cost per unit is always fixed.

 

·         Segregation of Total Costs into fixed Costs and Variable costs helps the Management to decide the scale of Production and Breakeven analysis. 

 

·         Example: A company Produces Pens.  Their fixed costs are Rs. 10000 and Variable costs are Rs. 10 per Pen.  Find the Total cost for 100 Pens and 200 Pens.

100 Units

Costs

No of Pens

Rate per Unit

Total

Fixed

100

100

10000

Variable Costs

100

10

1000

Total costs

100

110

11000

Selling Price

100

120

12000

Profit

100

10

1000

 

200 Units:

Costs

No of Pens

Rate per Unit

 

Fixed

200

50

10000

Variable Costs

200

10

2000

Total

200

60

12000

Selling price

200

120

24000

Profit

200

60

12000

 

·         From the above, the Fixed Cost per Unit is changed from Rs. 100 to Rs.50 when Production was increased from 100 units to 200 Units.  Whereas, Variable cost is remain fixed though production was increased from 100 units to 200 units.

 

So, when change in the Production:

 

·         Fixed cost per unit is variable  (though Total Fixed cost is fixed)

 

·         Variable cost per unit is fixed. (though Total Variable cost is variable)

 

·         The segregation of Total costs into Fixed Costs and Variable costs helps the firms to analyze the breakeven analysis. (Where there is no profit, no loss) and increase their profit capacity.

BEP –Break Even Point = Fixed Costs / Sales Price per Unit – Variable Cost per unit

·         In above example 100 units production level, BEP is 10000/120 – 10 = 91 Units.  

 

·         That means at the point of 91 units, there is no profit or no loss.

 

At 91 units

 

Costs

No of Pens

Rate per Unit

 

Fixed

91

109.90

10000

Variable Costs

91

10

910

Total

91

119.90

10911

Selling price

91

120

10920

Profit

91

0.10

9

 

Profit Rs.9 is almost negligible.  Hence at the production of 91 units, there is no profit, and there is no loss.   So Break Even Point (BEP) is 91 units

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Tuesday, March 24, 2020

Marginal Costing for LDCE


Marginal Costing

·         Total cost + Profit  = Sales   
  
·         Total Cost = Variable Cost   +  Fixed Cost  

·         So, Variable Cost + Fixed Cost + Profit  = Sales

·         Sales = Variable Cost + (Fixed Cost + Profit)

·         Contribution = (Fixed Cost + Profit)

·         Sales - Variable Cost = Contribution

·         I.e., S - V = (F + P)
or
·         S - V = C
or
·         C = S - V

·         Contribution = Sales - Variable Cost

·         Contribution = (Fixed Cost + Profit)

·         (Fixed Cost + Profit) = Sales - Variable Cost

·         Profit Volume Ratio (PV Ratio) = Contribution / Sales

·         BEP - Break Even Point = Where No Profit or No loss.

·         BEP - Break Even Point = Fixed Cost / P V Ratio

Problem:

Sales - Rs. 100,  Variable Cost - Rs. 80,  Fixed cost - Rs. 10.   Find the Sales at Break Even Point

Answer:

Contribution = Sales - Variable Cost

C = Rs. 100 - Rs. 80 = Rs. 20

PV Ratio = Contribution / Sales = Rs. 20/ Rs.100  = 0.20

BEP = Fixed Cost / PV Ratio

BEP Sales = Rs.10 /0.20  = Rs. 50

To Prove:

If Sales is Rs. 100,  Variable Cost is Rs. 80

If Sales is Rs. 50, Variable Cost is ?   = 50/100 x 80  = Rs. 40

Contribution = Sales - Variable Cost   Rs. 50 - Rs. 40 = Rs. 10


In Break Even Point, Contribution equals Fixed Cost.  Here too Contribution (Rs. 10) and Fixed Cost (Rs.10) are equal. That means No Profit or No loss at Sales Rs. 50.

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