Answer 1:

Standard Costing is an accounting technique that helps to calculate material performance, labor,
overheads and their variances, to take corrective action. The variances are then analyzed in depth
and re-established by comparing the actual costs with the standard average production costs along
with the explanations for the same. There are two types of variances: favorable, when the actual
cost is less than the standard cost and adverse, actual costs exceed standard costs.

These are the following steps taken to carry out Standard Costing:

• Setting Standards
• Determining Actual Costs
• Comparing between actual and standard figures
• Variance Analysis and Reporting
• Taking corrective action for the disposition of variances

Standard costing is an instrument used to assess and manage costs. With this technique, the
organization can make the efficient use of available resources possible. Additionally, by assessing the
deviations, i.e. analyzing the difference between actual performance and standard performance, the
management can keep a check on the organizational activities.

On the other hand, budgetary Control is a management function that directs and regulates the
activities of an organization in such a way that they reach the desired objectives. It is a
methodological approach in which the operations are planned in advance and then compared to the
actual results to determine whether or not the expected results are achieved. The following are the
major characteristics of this system:

• The budgets are adjusted to policy criteria.

• Constant comparisons to check the results are made between the actual output and the
budgeted targets.
• Revisions are made if the existing circumstances change.
• Where the desired outcomes are not obtained, necessary action will be taken.

Here, the word budget means a written financial statement prepared in advance for future periods
that is expressed in monetary terms, containing details of the organization’s financial activities.

The system of Budgetary Control allows management to correct the obligations and organize the
operations to produce the desired results. It helps managers measure the overall performance of the
organization. In addition, it also assists management by reviewing current trends in formulating
future policies.

No matter, these two controls are different, these two have key similarities. These are:

• Fixed standards are used for both budgetary and standard cost controls.
• Both strategies are targeted at pre-production cost determinations.
• Both strategies presume that costs can be managed along fixed accountability lines.
• In the case of both the techniques, actual are compared with the pre-determined standards.
• Periodic reports of comparative costs for both are needed.
• Both the techniques are intended to take corrective action in the case of adverse variances.
• Both aim to boost efficiency in performance.

However, they have certain key characteristics that makes them unalike each other. The following
are the major differences between standard costing and budgetary control:
 • Standard costing is a cost accounting method that calculates efficiency by contrasting actual
and standard costs. Budgetary Control is a control system where actual and budgeted results
are constantly compared in order to achieve the desired outcome.
• In Standard Costing, the distinction is made between actual cost and expected production at
standard cost. At the other hand, the contrast between the actual and the budgeted output
is made in Budgetary Control.
• Standard costing is limited to, cost data, but budgetary control is linked to company's both
cost concept and economic data.
• Standard Costing has a narrow focus, restricted to production costs only, while Budgetary
Control has a comparatively broader view as it covers all of the organization's operations.
• In Standard Costing variances are disclosed and recorded in budgetary control, but, because
the control is simultaneously exercised, the variances are not disclosed.
• Due to short-term changes in the conditions, standard costs do not change but budgeted
costs can change.
• Standard Costing is like a subset of Budgetary Control.
• Standard Costing applies to manufacturing concerns. In contrast to Budgetary Control, this
applies to all the organizations.

To conclude, both Standard Costing and Budgetary Control are the methods that provide a reference
point for assessing performance and analyzing discrepancy between actual and estimated figures.

But as Budgetary Control makes side-by side comparisons, the regular changes are made in the
budgets, and so it eliminates the need to mention the variances. And this is what majorly missing
from Standard Costing.
Answer 3:

Break-even is a situation where a business doesn't make or lose money, but it has covered all of its
costs. A break-even analysis is a financial tool that helps a business to decide, at what prices and
costs, the new service or a product will be profitable. In other words, it is a financial calculation to
decide the number of goods or services a business can sell to cover its costs (particularly fixed costs).

Analysis of break-even is useful in analyzing the relationship between the sales, variable cost
(contribution margin) and fixed cost. A company with low fixed costs will generally have a low break-
even point.

The basic formula for break-even point (in units and OMR value) is calculated by spreading the fixed
cost over the contribution margin, where contribution margin is the excess of selling price over
variable costs. And this represents the revenue earned to cover the fixed costs.

Break−even point ( ¿ unit )=total ¿ costs ¿

selling price per unit−variable cost per unit

Break−even point ( ¿ value )=total ¿ costs ¿ ∗selling price

selling price per unit−variable cost per unit
The break-even analysis is used by the businesses at different stages of production. Break-even
analysis is carried out when a new business is setup to check the viability of starting the business and
helps in setting the pricing strategies. Similarly, break-even analysis is used when a business is
deciding to create a new product or department. Business use this tool to assess if this new product
will significantly cover the costs and if launching the product will add to businesses’ profits.
Breakeven analysis is also used by investors and traders in considering an investment or trading
option.

The basic break-even analysis analyzes the cost structure of the business to analyze its ability to
generate profit. The calculations generated by break-even analysis are used by the business for
setting goals and making decisions.

For instance, break-even can be used to determine the budgeted sales and unused and excess
capacity to calculate the maximum achievable profit. It can also help in decisions such as whether
switching a fixed cost to a variable cost will increase or decrease profit. Further, if it also helps in
measuring the margin of safety and sensitivity of the product’s costs, prices and units.

Thus, it is the best in business interests to continuously track the breakeven level, which can
certainly help in reducing breakeven point where possible and increasing the profits.
i. The breakeven analysis is extremely helpful for planning and carrying out business profitability.
The benefits of breakeven analysis are as follows:
a. The breakeven analysis helps to measure the profit at various levels of sales. It shows
how marginal profit a business would make for every unit of sales. This makes it easy to
understand, as compared to profit and loss statement, for non-accounting management.
b. Breakeven analysis illustrates the relationship of costs, prices and volumes in the form of
simple breakeven chart, which linearly shows maximum information and important
analysis in the form of graphical representation.
c. The breakeven graph is very helpful to the management in making important decisions.
The reason for this is that the break-even chart shows the effect of changes in fixed cost,
variable cost, selling price and sales volume on profits. It is also useful for estimating
costs and income at various production and sales
d. The breakeven analysis helps management to set the correct selling price of the product.
It can also help the management to compute the profit by changing selling prices to
come up with the optimal selling price which generates the maximum profits.
e. The breakeven point also shows the margin of safety and sensitivity of the costs, prices
and volumes on profits. It shows the margin by which the costs, selling price or volume
can fluctuate and still breakeven.
However, breakeven analysis has its benefits in calculating effects of volume and costs on profit,
it also has its limitations and flaws based on several assumptions.
a. The breakeven analysis assumes all variables to remain constants and measures the
change in profit based on change in volume. However, in reality, this is not always the
case. The costs and prices are subject to change with the level of output. As the output
and production is increased, the variable costs and fixed costs will decrease as the
business may achieve economies of scale. Similarly, the selling prices tend to fall as sales
increases.
b. The breakeven analysis cost and revenue functions are linear in nature. This can be true
for small businesses on short run with restricted level of activities. However, for larger
businesses with complex activities the breakeven analysis is rather too simple as it fails
to account complex activities and their calculations. Also, the linear function of
breakeven analysis limits it to short run and is not applicable for long run functioning.
c. The breakeven analysis breaks down its cost in either fixed cost or variable costs. This
ignores the concept of semi-variable or semi-fixed costs, for example, the telephone bill
consists of line rent which is fixed and call charges which are variable. Such expenses
make calculations of breakeven point a little inaccurate.
d. Similarly, the concept of stepped fixed costs. Certain fixed costs that remain fixed over a
certain range of output, for example, the cost of warehouse, where a warehouse has a
capacity of 10,000 units, the 10,001 st unit will incur additional full cost of another
warehouse. These costs which are based on capacity and changes after certain level of
activity make breakeven analysis less reliable.
e. Another limitation to breakeven analysis is that it is based on marginal costing and not
on absorption costing. It assumes that all the products produced will be sold. In reality,
this is an impractical assumption, as all the goods produced are never sold in the same
accounting period, hence, the closing inventory.
f. The breakeven analysis does not factor in other accounting concepts such as cash flow
and time value of money.
ii. The example will help better to understand the concept of breakeven analysis; how to calculate
it and use it for making decision:

Suppose Nestle Company is already operating in Oman and is selling Nestle mineral water bottles. It
goes through a major breakthrough and plans to introduce the new Nestle ground water bottles.
This will add fixed cost of OMR 6000 to its existing fixed of OMR 14000 per month. The variable cost
of producing ground water bottle will OMR 5 and it will be sold at OMR 15. Nestle expects a demand
1000 ground water bottle per month (with capacity of 2000 bottles per month). Currently, Nestle is
selling 2200 mineral bottles (with capacity of 3000 bottles per month) at a price of OMR 10 and
incurs a variable cost of OMR 3.

So, first we will calculate the individual breakeven points of ground water and mineral water
in units and OMR.

for ground water :

Break−even point ( ¿ unit )=total ¿ costs ¿

selling price per unit−variable cost per unit
6000
Break−even point ( ¿ unit )= =600units
15−5

Break−even point ( ¿ OMR )=total ¿ costs ¿ ∗selling price

selling price per unit−variable cost per unit
6000
Break−even point ( ¿ value )= ∗15=OMR 9000
15−10

for mineral water :

Break−even point ( ¿ unit )=total ¿ costs ¿

selling price per unit−variable cost per unit
14000
Break−even point ( ¿ unit )= =2000 units
10−3

Break−even point ( ¿ OMR )=total ¿ costs ¿ ∗selling price

selling price per unit−variable cost per unit
14000
Break−even point ( ¿ value )= ∗10=OMR 20000
10−3
With the help of this breakeven analysis, nestle is already making a profit of OMR 1400 (2200*7-
14000) by selling its mineral bottles. However, if it wishes to add new ground bottles, it will need to
sell 600 bottles of ground water to clear breakeven point. Selling an expected of 1000 bottles will
generate a profit of OMR 4000. Upon this breakeven analysis, Nestle should consider introducing
and selling ground water bottles as well.

Furthermore, Nestle could also use Mineral Ground

CASE 1 Total
breakeven analysis to come up with a Water Water
new product mix to maximize its profit. Sales 22000 15000 37000
For instance, in case 1 it sells at its Variable Costs 6600 5000 11600
budgeted demand. Contribution
15400 10000 25400
margin
Weighted
68.65%
average cont.
Fixed
Breakeven
cost/weighted 20000/68.65% 29,113
Revenue in OMR
average cont.
 Mineral Ground
CASE 1
Water Water
Selling price OMR 10 OMR 15
Variable Cost OMR 3 OMR 5
Units sold 2200 1000
Total fixed costs OMR 20,000
Units capacity 4000 2000

The breakeven point in value is OMR 29,113 and changing the product mix will change the
breakeven in value.

Similarly, in case 2, it produces breakeven point of ground water and remaining mineral water

Mineral Ground Mineral Ground

CASE 2 CASE 2 Total
Water Water Water Water
Selling price OMR 10 OMR 15 Sales 26000 9000 35000
Variable Cost OMR 3 OMR 5 Variable Costs 7800 3000 10800
Units sold 2600 600 Contribution
18200 6000 24200
Total fixed costs OMR 20,000 margin
Units capacity 4000 2000 Weighted
69.14%
average cont.
Fixed
Breakeven
In this case, the change in production cost/weighted 20000/69.14% 28,927
Revenue in OMR
mix reduced the Breakeven revenue average cont.
is OMR 28,927.

Nestle can use the breakeven analysis to compute the optimal production mix to have the maximum
possible breakeven revenue.

Mineral Ground CASE 3

CASE 3
Water Water Optimum Mineral Water Ground Water Total
Selling price OMR 10 OMR 15 Level
Variable Cost OMR 3 OMR 5 Sales 12000 30000 42000
Units sold 1200 20000 Variable
3600 10000 13600
Total fixed costs OMR 20,000 Costs
Units capacity 4000 2000 Contribution
8400 20000 28400
margin
Weighted
67.62%
SO, with the help of breakeven average cont.
analysis, Nestle can also come up with Breakeven Fixed
a production mix that can maximize its Revenue in cost/weighted 20000/67.62% 29,577
contribution margin, profit and OMR average cont.
breakeven in revenue.
iii. To construct a breakeven chart, let’s assume the following data.
Selling price per unit: OMR 12 Units sold: 8000
Variable cost per unit: OMR 8 Fixed Cost: OMR 20,000

With the help of data, the following table can be formed and the graph can be plotted

Units Variable Cost Fixed Cost Total Cost Revenu

e
1000 8000 20000 28000 12000
2000 16000 20000 36000 24000
3000 24000 20000 44000 36000
4000 32000 20000 52000 48000
5000 40000 20000 60000 60000
6000 48000 20000 68000 72000
7000 56000 20000 76000 84000
8000 64000 20000 84000 96000

Break Even Analysis

120000

100000 Margin of
Safety (in
Profit
reveune)
80000 Breakeven
point
Breakeven
60000 revenue

40000 Loss

20000
Margin of Safety
(in units)
0
1000 2000 3000 4000 5000 6000 7000 8000

Variable Cost Fixed Cost Total Cost Revenue

20000
Break−even point ( ¿ unit )= =5000 units
12−8
20000
Break−even point ( ¿ revenue )= ∗12=OMR 60000
12−8

The breakeven graph illustrates the variable costs, fixed costs, total costs and revenue at each level
of output. The x axis of the graph shows the units sold and y axis labels the revenue earned at every
level of output.

The variable costs, shown on the graph, are all those costs that varies as the level of output changes,
e.g. the cost of raw material used, direct labour hours used. At 0 level of output variable costs are 0.

The fixed costs, shown on the graph, are the costs that remains fixed at all level of outputs. Unlike
variable costs these costs do not vary. Even at 0 level of output, a business will incur the fixed costs.
Example of such costs are rent expense, utility bills, telephone expense etc.
The total cost is the major cost in computing the breakeven point. It is the sum of variable costs and
fixed costs. The total costs show the total expenses a company meets to earn its revenue.

The revenue is the product of sale of output and the selling price. The revenue is 0 at 0 output level.
To compute the breakeven point, the total revenue is matched against the total costs. Breakeven
point is the point at which total revenue intersects the total costs. The x axis of breakeven point is
the breakeven in units and y axis is the breakeven in revenue (which is 5000 units and OMR
600,000). The profit at this point is 0. The difference in total revenue and total costs over and above
breakeven point is the profit and below the breakeven point is the loss.

The excess in units and revenue, over and above the breakeven point is margin of safety in units and
revenue.