EFFECTIVE APPLICATION OF BREAK-EVEN ANALYSIS IN MANAGEMENTS FIRMS

By

NNAMANI UDOCHUKWU CHUKWUMA

Presented To

Department of Accountancy

ABSTRACT

This research work is an appraisal of the "EFFECTIVE APPLICATION OF BREAKEVE ANALYSIS IN MANUFACTURING FIRMS"

This work is firmly directed towards, the need and usage of breakeven analysis by managers and accountants in manufacturing firms. Breakeven analysis is a management tool that could be used in making vital decisions when a firms is faced with problems having lost, volume and profit implication However, breakeven analysis can be a valuable and reliable decision making tool if it is exhaustively conducted and applied.

Based on the findings, some recommendation on two to revert the situation towards effective application were made which include:

1.  That seminar, symposia and workshops on application breakeven analysis should be organized by bodies like the Institute of Chartered Accountants of Nigeria (ICAN), Nigeria Institute of Social Economic Researcher (NISER) Nigerian Institute of Management.
2. That the Institute of Chartered Accountants of Nigeria should start the publication of a new professional journals in Nigeria devoted solely to the development of the theory and application of management accounting principles and techniques.

Hence, we therefore conduce that if the above mentioned recommendations are understood, accepted and implemented. Our manufacturing firms will be able to make better cost-volume-profits decisions, which will result is increased efficiency of the manufacting sector or industry.

TABLE OF CONTENTS

Title page

Approval page

Dedication

Acknowledgement

Abstract

Table of content

CHAPTER ONE

1.0 Introduction

1.1 Objective/ purpose of the study

1.2 Significances of the Study

1.3 Scope of the Study

1.4 Limitation of the Study

1.5 Definition of Terms.

CHAPTER TWO

2.0 Definition

2.1 Functions

2.2 Ways of Regulations

CHAPTER THREE

3.0 Summary of Findings

3.1 Conclusion

3.2 Recommendation

BIBLIOGRAPHY 

CHAPTER ONE

1.0 INTRODUCTION

In considering how the management accountant can be assistance in producing answer to questions about the consequences of following a particular course of action. Such questions might include: What would be the effects of profits if we reduce our selling price and sell more units? What sales volume is required to meet the additional fixed charge from a proposed plant expansion? Should we pay our sales personals on the basis of salary only or on the basis of commission only, or by a continuation of both? These and other questions can be considered using Breakeven Analysis which is the most widly known form of cost-volume-profit analysis. For this reasons, the two terms are used interchangeably by many.

Breakeven analysis is a systematic method of examining the relationship between changes in volume (that is output) and changes in total sales revenue, is a specific way of presenting and studying the inter relationship between cost-volume and profit. As a model of these relationships. Breakeven analysis simplifies the real work condition which a firm will face. It provides information to management in most lucid and precise manner and it is an effective and efficient financial reporting system.

Breakeven analysis is based on the relationship between sales volume, cost are profit in the short run, the short run being a period which the output of a firm is restricted to the same available from the current operating capacity. In the short-run some input can be increased but other cannot.

Hence, breakeven established a relationship between revenue and cost with respect to volume. It indicates the level of sales at which costs and revues are in equilibrium. The equilibrium point in commonly known as the breakeven point. The breakeven point is the point of sales volume at which revenue equal to total costs. It is a point of no loss.

One of the important prerequisites of using the breakeven or C-V-F analysis is that costs can be separated into fixed costs and variables costs, variable costs change in direct proportion to change in volume of activity which fixed cost remains constant to any given volume of activity. For the breakeven point to occur, its necessary that the firm has both variable and fixed costs. If all costs of the firm were variable no profits no loss situation will arise at zero sales volume and profits would be varying proportionately with sales. On the then hand, if all costs were fixed the breakeven would occur at a point were revenue are equal to fixed costs and afterwards profits would be equal to the sales volume.

1.1 PURPOSE OF THE STUDY

Some people do not know the benefits of effective applications of breakeven analysis which has a tremendous positive effects on the profitability of manifesting firms this however is designed to do the following:

• To establish what will happen to the financial result if a specified level of activity or volume fluctuates.
• To highlight the numerous advantages of the application of breakeven charts and ratios in decision making.
• To ascertain the effective and efficient level of operation for manufacturing firms.
• To seek and find out the actual role of breakeven analysis in manufacturing firms.
• To verify whether management accountants to find difficulties in their course of making use of the tool.
• To seek ways of solving the breakeven analysis problems.
• To make recommendations on how to improve on the set back suffered by the non-usage of breakeven analysis.

1.2 SIGNIFICANCE OF THE STUDY

This study will enable the management accountants know the advantages and interpretation to management. This work will also help students who will study related courses in future to make use of this work in their academic and research work. It is also working of note that the recommendation in this research work will help to solve some of the problems encounted by the accountants.

Nevertheless, since the project work would be in the library there is always the accessibility to these members of the public, they can read and become aware of the better performance that is associated with the effective and efficient application of the breakeven analysis in manufacturing firms. This will increase their knowledge no doubt.

1.3 SCOPE OF THE STUDY

A research into the effective application of breakeven analysis in manufacturing firms is a wide topic. It involves an extensive and objective research into the policy objective and business activities of all the different types of manufacturing firms in Nigeria both at the Federal and State Level, considering that there are different historical, Political Social and Economic motives for setting up manufacturing firms and differences in orientation at the Federal and State Level as well as the large members of the manufacturing firms in existence, the study consequently becomes Invariably a difficult one.

In an effort to keep the research work within the spectrums considering limited time and resources. The researcher has localize and confirmed the study of manufacturing firms using three (3) manufacturing firms in Enugu Metropolis as the case study.

The manufacturing firms are:

• Eastern plastics Nigeria Limited
• Niger Gas Nigeria Limited
• Emanate Nigeria Limited.

1.4 THE LIMITATION OF THE STUDY

The examination of the these effective application of breakeven analysis in manufacturing firms is the limit of the study. This work is concerned with effectiveness of the use of breakeven analysis as a result it is limited to measuring the adequacy and not the properties in the us e of this decision tool. There are two major approaches to the analysis of cost-volume-profit inter-relationship. They are

v The Accountant Approach

v The Economist Approach

For concentrated and through probe, this work examined the accountants alternative and how it is used by accountants. Finance is also a limitation to this study because to collect comprehensive data required, funds are needed for the smooth conduct of the project.

Through adequate confidentiality of subject answers in promised the data collected cannot be said to be without bias. Some questions may be ticked wrongly by the respondents just to feign usage of scientist decision making models. I am not trying to asset "Bias response" occurred but have just made a statement with probabilities undertones on what may have occurred during the data collection stage of this research.

However these limitations were not allowed to destroy the essence of the project work.

1.5 DEFINITION OF TERMS

BREAKEVEN This is a situation where neither profits not loss

is made or incurred.

BREAKEVEN POINT These are the relation which exists between

cost, prices, volume of production and profits

of business. They are also known as cost-

volume-profit relationship.

BREAKEVEN RATIONS These are the algebraic expression of

breakeven relationships.

BREAKEVEN BAISCE ANALYSIS This is the primary cost-volume

profit analysis that assumes

certainty.

CONTRIBUTION MARGIN This is the difference between selling

price and variable cost.

MARCUR OF SAFETY This is the difference between the

breakeven point and an anticipation or

existing level of activity.

FIXED COSTS These are costs that remains fixed in

total over a givens range of productivity

and for a given time.

SEMI-VARIABLE - COST This is a cost that possess both variable

cost and fixed cost characters this in that

part of cost is fixed and the other part

varies with the volume of out put.

COMPREHENSIVE BREAKEVEN INFORATION Breakeven point

margin of safety. profit or loss at any

activity level. Contribution any activity

level. The P/V ratio of the breakeven

relations.

P/V RATIO this is a ratio that tells the share of naira

sales that is available for Contribution to

the defrayment fixed cost and if

adequate accumulation of profits.

Specifically, it is the ratio of

contribution to sales.