Part A: how to construct a typical break-even point graph:
The Break-even point can be found by graphing the cost and revenue relationships. The following are the steps to do so:
| Step 1:
Draw the axes. The horizontal axis the sales volume and the vertical axis is dollars of cost and revenue.
Step 2:
Plot sales volume. Select a convenient sales volume and plot a point for total sales dollars at that volume. Then draw a line between the origin and the point.
Step 3:
Plot the fixed expenses. It should be a horizontal line intersecting the vertical axis at the level of fixed costs
Step 4:
Plot variable expenses. Determine the variable expenses at some volume level. Add this amount to fixed expenses and plot the point. Then draw a line from the intersection of the vertical axis to this point. This line represents total expenses, and the difference between the fixed expenses line and this new line represents the variable expenses.
Step 5:
Locate the break-even point. The break-even point is where the total expenses line crosses the sales line. |
Part B: What are the assumptions used in the construction of a break-even graph:
Assumptions used in constructing the break-even graph :-
- Expenses may be classified into variable and fixed categories
- Behavior of revenues and expenses is accurately portrayed and is linear over the relevant range
- Efficiency and productivity will be unchanged
- Sales mix will be constant. Sales mix is the relative proportions or combinations of quantities of products that constitute total sales
- The difference in inventory level at the beginning and at the end of a period is insignificant.
Refresh or test your managerial accounting knowledge on accounting systems or information:
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Multiple choice question
1. Accounting reports which are used by managers to compare actual results to budgeted performance in order to perform management by exception are called:
a. Exceptional reports
b. Performance reports
c. Budgets
d. General ledgers
2. Which of the following should be considered in the selection of an accounting system?
a. Costs of buying and operating the system
b. Improved decision-making power resulting from the system
c. Behavorial effect of the systems on managers
d. All of above
3. Accounting systems should be designed to answer which of the following types of questions?
a. Scorecard, attention directing, and problem solving
b. Who, what, when, where, why and how
c. Social implication of environmental policy
d. Philosophical ones
4. The major users of accounting information are:
a. Internal managers for non routine decisions
b. Internal managers for planning and control purposes
c. External parties for making decisions about the company
d. All of these
5. The functions of planning for control, evaluating and consulting, and government reporting are typically assumed within organizations by:
a. The company treasurer
b. The company controller
c. The company vice-president of marketing
d. External auditors
6. Revenues are expected to exceed expenses in which phases of the product life cycle?
a. Mature market
b. Phase-out
c. Product development
d. Introduction to market
e. Both a and b
7. Individuals whose main function in organizations is to assist operating managers in decision making are working in:
a. Staff roles
b. Line roles
c. Operating roles
d. Chief executive roles
8. Trends that are causing changes in management accounting today include:
a. Advances in technology
b. Increased global competition
c. A shift from a manufacturing to a service-based economy
d. All of the above
Answers:
1 b ; 2 d ; 3 a ; 4 d ; 5 b : 6 e ; 7 a ; 8 d
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