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Break-even Analysis

In management accounting, break-even analysis is a technique aimed at finding the level of sales (in units or dollars) at which a company is neither making a profit nor incurring a loss.

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Differential Analysis

Differential analysis (also called incremental analysis) is a management accounting technique in which we examine only the changes in revenues, costs and profits that result from a business decision instead of creating complete income statements for each alternative.

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Segment Margin

Segment margin is the amount contributed by a segment towards common fixed costs and profit of a business. It equals the contribution margin of a segment minus traceable fixed costs i.e. fixed costs which can be traced to it.

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Contribution Margin per Unit

Contribution margin per unit is the net amount that each additional unit sold contributes towards a company’s fixed costs and profit. It equals the difference between the product’s sales price and variable cost per unit.

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Derivation of DOL Formula

Degree of operating leverage (DOL) is defined as percentage change in operating income that occurs in response to a percentage change in sales. In this article we use this definition to derive different formulas for DOL.

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Manufacturing Overhead Costs

Manufacturing overheads costs represent all such costs which are incurred in production of goods excluding direct materials and direct labor. Manufacturing overhead costs are further classified into fixed manufacturing overhead costs and variable manufacturing overhead costs.

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Variable Costs

In management accounting, variable costs are cost items whose total cost varies proportionately with some underlying activity level such as total units, labor hours, machine hours, etc.

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Mixed Costs

Mixed costs (also called semi-variable costs) are costs that have both fixed and variable components. The fixed element doesn’t change with change in activity level at all and the variable component changes proportionately with activity.

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Trial Balance

Trial balance is a draft report used by accountants that simply lists all the ledger account balances extracted from the accounting system of a business at a given date.

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Fixed Costs

Fixed costs are costs which do not change with change in output as long as the production is within the relevant range. It is the cost which is incurred even when output is zero.

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Variable Cost Ratio

Variable cost ratio is the ratio of variable costs to sales. It equals total variable costs divided by total sales or variable cost per unit divided by price per unit or 1 minus contribution margin ratio.

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Break-even Chart

A break-even chart is a graph which plots total sales and total cost curves of a company and shows that the firm’s break-even point lies where these two curves intersect.

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Depreciation Methods

A depreciation method is the systematic manner in which the cost of a tangible asset is expensed out to income statement. Popular depreciation methods include straight-line method, declining balance method, units of production method, sum of year digits method. For tax, MACRS is the relevant depreciation method.

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Depreciation

Depreciation is the process through which the cost of a tangible asset i.e. property, plant and equipment is charged as an expense on income statement. Popular depreciation methods include straight-line method, declining balance method, units of production method and MACRS.

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Held for Sale Assets

Held for sale assets are long -lived assets for which a company has a concrete plan to dispose of the asset by sale. They are carried on balance sheet at the lower of carrying value or fair value and no depreciation is charged on them.

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Full Cost Method

Full cost method is a method of accounting for oil and gas exploration costs in which all exploration costs are capitalized when they are incurred, and none are expensed out.

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Purchase of Fixed Assets

When a fixed asset is purchased, it is recognized as an asset on balance sheet by debiting the asset account and crediting cash or accounts payable or notes payable depending on whether it is a cash purchase, credit purchase or deferred payment.

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Tangible Assets

Tangible assets are long-lived assets which have physical existence. They are also referred to as property, plant and equipment (PPE). They are capitalized on balance sheet and depreciated over their useful lives.

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Basket Purchase

A basket purchase is a transaction in which multiple fixed assets are purchased together. If the cost can’t be assigned, it is allocated to the assets based on their appraised value.

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Carrying Value

Carrying value of a fixed asset (also called book value) is the amount at which a fixed asset appears on a balance sheet. It equals the original cost or revalued amount of the asset minus accumulated depreciation and accumulated impairment loss, if any.

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Recoverable Amount

Recoverable amount is the higher of fair value less costs to sell and value in use. The carrying value of a fixed asset is compared with recoverable amount to find out impairment loss, if any.

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