5 OBJECTIVES OF BREAK-EVEN ANALYSIS

The following are the objectives of the break-even analysis

  • In order to forecast profit accurately, it is essential to know the relationship between profits and costs on the one hand and volume on the other.
  • Cost-volume-profit analysis is useful in setting up flexible budgets that indicate costs at various levels of activity.
  • Cost-volume-profit analysis is of assistance in performance evaluation for the purposes of control. For reviewing profits achieved and cost incurred the effects on costs of changes in volume are required to be evaluated.
  • Pricing plays an important part in stabilizing and fixing up the volume. Analysis of the cost-volume-profit relationship may assist in formulating price policies to suit particular circumstances by projecting the effect which different price structures have on costs and profits.
  • As predetermined overhead rates are related to a selected volume of production, the study of cost-volume relationship is necessary in order to know the amount of overhead costs which could be charged to product costs at various level of operation.

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