8/30/22, 8:30 PM Break Even Point in Accounting - Formula, Calculation

What is Break-Even Point In Accounting?

Break-Even Point in Accounting refers to the point or activity level at which
the volume of sales or revenue exactly equals total expenses. In other words,
the breakeven point is the level of activity at which there is neither a profit nor
loss and the total cost and revenue of the business are equal.

It is that level of business activity where the sales are just enough to meet the
total cost, which includes both Fixed and Variable Costs. Also, the Breakeven point
acts as an essential level for a business to attain before making a profit. The
accounting break-even point can be computed in different ways.

Table of contents

What is Break-Even Point In Accounting?

Formula
Importance of Break-Even Point in Accounting
Calculation Example
Advantages
Disadvantages
Conclusion
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Formula

Another formula to calculate Break-Even Point in Accounting

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Importance of Break-Even Point in Accounting

To understand the importance behind the Break-Even Point in Accounting, it is of
paramount importance to understand the classification of Costs. Cost is
classified as either Fixed Cost or Variable Cost.

Fixed cost is independent of the level of sales and is of a fixed nature. Some
of the popular examples include Rent, Insurance, etc.
Variable Cost is directly linked to the level of sales. Examples include
commissions etc.

Segregation of cost into “Variable Cost” and “Fixed Cost” and their relationship
with Sales and Profit is vital in undertaking the Break-even point Analysis. First, by
segregating the cost into Fixed and Variable, a business can ascertain the 
sunk cost in nature (Fixed Cost) and not be directly impacted by sales. Secondly,
once a business can verify the proportion of Variable Costs to its Sales, it can
implement strategies that can result in Cost Efficiency, resulting in better 
cost management and more profits.

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8/30/22, 8:30 PM Break Even Point in Accounting - Formula, Calculation

Breakeven Point Analysis helps businesses understand its Cost Structure vis a vis
their Sales Revenue and how the same gets affected as Revenue changes. It helps
them determine the breakeven point for different sales volumes and cost
structures. With this information, the management can better understand the
overall performance and decide what units it should sell to break even or reach a
certain profit level.

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