Cost behaviour is very important for the management and also for the top authorities so that they can plan and control their costs of organization. Budgets and modification reports are more real when they reproduce cost performance patterns. Cost behaviour are also necessary for actually seeing whether the company is generating profits or not . In other words we can say that if the company can recover all their costs and have reached to a breakeven point and also for the analysis of cost volume profit analysis. Cost behaviour often varies separate of the relevant range of movement due to a modification in the costs that are fixed . When size increases to a certain limit, more fixed charges will be actually added. Any corporate manufactures products in its 100,000 four-sided foot plant. Plant capacity is 500,000 units of output and its normal production is 400,000 units annually. When the manufacturing units are between 300,000 and 500,000 units, it need good managers and senior managers who are salaried at least $500000. Below 300,000 units of production, some of the remunerated manager places would be removed. Above 500,000 parts, the corporation will be bound to add more managers and space. The costs vary with the level of activity but the costs that remain unaffected are fixed costs. Fixed costs are costs that are fixed that does not vary with the activity. Even if the production is high the fixed costs will not change. In variable costs if the level of production changes the costs get increased. Variable costs are costs such as rent ,any type of advertising , any insurance and supplies of office,. Fixed costs and variable costs comprise of the total costs incurred in a company arable costs can comprise direct substantial costs or straight labor costs essential to complete a certain project. The term varied costs often mentions to the performance of costs and expenditures. Mixed prices consist of a fixed constituent and a variable constituent. The annual expenditure of working an car is a mixed price. Some of the expenditures are secure, beck in total as the number house they don’t vary in annual miles change. /mixed costs contain both elements of fixed costs and variable costs. For example if u see in truck rental, renting a truck has an immovable cost of $200, with adjustable or variable costs of $0.50 a mile. CVP analysis is important for cost controlling and also arising at correct profits (Accounting coach, 2017)
(David J. , 2017)
Contribution is the earnings that is available after all the direct costs have been subtracted from revenue. The remainder that is available is called contribution. Fixed costs when deducted from the contribution is called profit. The contribution concept is usually mentioned to as involvement or contribution margin, which is the remaining amount divided by incomes. It is easier to assess contribution on a proportion basis, to see if there are variations in the proportion of contribution to revenues over a period of time. Contribution is actually based on accrual basis of accounting , therefore we can conclude that the costs that are actually related to the revenues are actually identified in the same period as revenues. (Accounting tools, 2017)
It is useful in actually many ways
Pricing : Special pricing contracts should be intended to yield some sum of contribution; otherwise a business is fundamentally losing cash every time it makes a sale.
Helps in fixing of capital expenditure: It helps in fixing of capital expenditure , like in case of robot. If a robot is installed there will be low labor costs but high fixed costs will be there
Helps in Budgeting: The organization team can use approximations of sales, undeviating costs, and secure costs to predict revenue levels in future ages.
A shared consequence of influence analysis is an augmented sympathetic of the amount of units of creation that must be vended in order to provision an incremental upsurge in fixed costs. This information can be castoff to drive down immovable costs or upsurge the influence margin on produce sales, which will lead to increase in profits.
Break even analysis. :Break even analysis is actually a very strong tools for company or indivuals having a startup reach-even examination involves the scheming and inspection of the margin of safety for incorporation based on the revenues composed and associated costs. Break-even examination looks at the flat of fixed prices comparative to the profit earned by each added unit shaped and wholesaled. In overall, a business with lower fixed expenses will automatically have break-even point of sale. Breakeven is actually determined by two factors expected revenue and all the project costs. Revenue is actually much more effected by the demand of the market
The usefulness of breakeven analysis are
It tells us how much output is required actually
He understand the position of the business ,its viability (Business , 2017)
It tells us the merging of safety concept and due to this sales forecast can demonstrate over-optimistic before losses are found.
Helps entrepreneur recognize the level of risk involved in a start-up
It gives really quick estimates of anything and everything and helps in decision making
3. Limitations of breakeven analysis
Impractical expectations – products are not vended at the same worth at dissimilar levels of production; fixed budgets or expenses do vary when there is a change in output (Kokemullar, 2017)
Sales are not same as output – there are actually some stocks that are build up and wasted too.
Variable expenditures do not continuously stay the same. For specimen, as output rises, the commercial may be getting advantage from being able to buy inputs at lower charges (buying influence), which would diminish variable charge per unit.
Most productions who actually sells more than one product, so break-even for the professional get harder to calculate
Break-even analysis should be seen as a planning aid rather than a decision-making tool (Business, 2017)
Analysing the reports of FMCG the factors that influence the breakeven prices are
The break-even point for any corporation describes the situations at which the revenue generated from products and amenities which actually equals the total costs that have been put in to the business.
Breakeven is actually determined by two factors expected revenue and all the project costs. Revenue is actually much more effected by the demand of the market. People will actually demand the product and it will actual lead to more sales and actual yet will lead to coroner recovery of costs.
The three major influencers are business that needs only $10,000 to jump has a much healthier chance to reach breakeven point sooner than the ones wanting more money
business that needs only $10,000 to jump has a much healthier chance to reach breakeven point sooner than the ones wanting more money
Variable and fixed costs
Variable costs are the costs that changes with the level of the activity and changes with the level of output and in case of fixed costs it remain the same irrespective of the activity. High adjustable costs mean you have to sell a high capacity of goods or facilities to earn enough gross income to cover secure costs and then startup costs are paid off (Davi, 2017)
In FMCG Net income after tax for FY16 was US$985 million with the optimistic contribution from reduction of the expenditure more than offsetting the effect of the lower iron ore price compared to FY15 (2015 Annual report, 2017)
The Iron Ore Mining manufacturing’s income is expected to reduction at an yearly 4.1%, to $59.7 billion over the five years through 2016-17. Early in the retro, strong financial development in China augmented iron ore mining growth and herd greater steel production
The spectacular drop in iron ore instant to below $US45 a ton has actually put the sector's manufacture submerged, and puts the "third force" in Pilbara iron ore, Fortes cue Metals Group, under new pressure.
Majors BHP Billiton and Rio Tinto break even at an iron ore price of about $US31 to $US32 a ton so are making good profits. Fortes cue says its breakeven is $US39 a ton, so it is manufacturing decent cash, but some forecasters argument that figure, with UBS putting it at $US44
The brutal fall of 10.1 per cent overnight on Wednesday to a fresh six-year low of $US44.59 a ton, puts manufacture for greatest of the sector in the bloodshot.
Atlas Iron, which is annoying $180 million company-saving capital raising this week, is one of the subordinates most at risk at present price (Ibis Report , 2017)
Its breakeven is $US52.50 to $US53.50 - but the miner has said that should fall to $US50 by December
2015 Annual report (2017).FMCG [online] Available at: file:///C:/Users/com/Downloads/1490674_172893643_1953-89fmg-2015-annual-report.pdf [Accessed 4TH June. 2017]
Ibis world (2017).Iron ore mining in Australia[online] Available at: file:///C:/Users/com/Downloads/1489561_2059820364_IBISIronOreMininginAustraliaIn%20(3).pdf [Accessed 4TH June. 2017]
Business (2017) Break even analysis[online] Available at: https://www.tutor2u.net/business/reference/breakeven-analysis-strengths-and-limitations [Accessed 4TH June. 2017]
Kokemullar , N(2017).Company breakeven point[online] Available at: https://smallbusiness.chron.com/affects-companys-breakeven-point-66092.html [Accessed 4TH June. 2017]
Accounting tools N(2017).Contribution[online] Available at: https://www.accountingtools.com/articles/what-is-contribution.html [Accessed 4TH June. 2017]
David , J(2017).Fixed cost and variable cost[online] Available at: https://businessecon.org/2015/01/fixed-and-variable-costs-in-a-restaurant/ [Accessed 4TH June. 2017]
Accounting coach(2017).What is cost behqaviour[online] Available at: https://www.accountingcoach.com/blog/what-is-cost-behavior [Accessed 4TH June. 2017]