Question

11.10 Why is an understanding of cost behaviour (e.g. fixed costs,

variable costs, etc.) important? Will such understanding be more important for financial accounting or for management accounting?

11.11 Why do we bother with break-even analysis? A business is formed

to earn profit, not just to not make a loss (e.g. break even). Discuss.

Answer 1

11.10. Understanding of cost behaviour is most important concept in Management Accounting. To understand Cost behaviour is important as it is critical to planning, decision making and controlling. Budgets and variance reports are more effective when they reflect cost behavior patterns. Cost behavior means the way various types of production costs change when there is a change in level of production. There are mainly two types of cost. One is the Variable cost and as the name suggests it varies / changes with the level of production.This means that total variable cost increases when more number of units are produced and decreases when less units are produced. In other words it is direclty proportional to the level of production. Some of the examples are Direct material cost, labour cost etc. Another cost is Fixed Cost and as the name suggest this is fixed in nature and doesn't vary with the level of production.These costs will incur even if no units are produced. Some of the examples of fixed cost is Rent, Depreciation etc.

11.11 To conduct a breakeven analysis is an important step for every business to determine what sales volume is necessary to cover its costs. It's especially important for start-ups businesses to set their initial sales goals.The breakeven point is where the business's total income /revenue is equal to its total expenses. This means NO profit NO loss situtation of any business is called its break even point. Break even analysis is important for profit planning, setting the best prices of its products, setting appropriate goals for sales volume & cost. To evaluate the effects of costs on changes in volume it would be required. Break even analysis is also an important tool while preparations of Budgets & Forecasts for the business.