Question No. 1 - MMPC 01 - Management Functions and Organisational Processes - MBA and MBA (Banking & Finance)

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MMPC 001 - Management Functions and Organisational Processes

MMPC-004/TMA/JULY/2022

Question No. 1. Briefly describe the functions of management and discuss their importance in the functioning of the organisations.

One of the most important activities that all of us engage in, is managing. Ever since human life started either to organize for food or shelter, the elements of management were subtly seen in all these activities. History also confirms the application of management techniques, which are visible even today. The Egyptian pyramids built centuries ago, are evidence of excellent organizational skills of scores of workers in those times, thus making us believe that a number of management functions were in use long ago. Similarly, Indus valley civilization also demonstrates the use of management techniques of a higher level of sophistication, considering the time it was built. Further, these instances also show that management has been an inherent part in human survival and organized activity as well. As societies grew, individuals could not achieve their goals individually and hence their efforts as a group had to be coordinated through the management function. The groups increased in number, thus making the role of the managers critical for success in the contemporary context. 

It is in this context that Mary Parker Folletthas defined “management as the art of getting things done through the efforts of others”. Although this definition relates to the accomplishment of the task and the people dimension, it has been elaborated further by Herald Koontz and O’Donnel, when they brought the organized group into the definition. According to them, “management is the process of getting things done though the organized group efforts”. The people dimension has been the focus of Harold Koontz, when they said “Management means Manage Men tactfully” to label itManage/Men/T As the meaning and definition evolved, the focus on the process gained importance. F W Taylor defined management “as the art of knowing what you want to do in the best and cheapest way”In spite of various definitions, the dynamic nature of management makes it difficult to have a universally accepted definition encompassing all its dimensions in its entirety. In summary, the essence of management revolves around managing people and other resources in an organization both internal and external, leading to the achievement of the objectives of the organization. The meaning could be better understood by examining the nature of management.

All managers, irrespective of the level- top, middle and lower –perform management functions. However, the time spent by the managers on these activities differ based on the level at which there are placed. For example, the top managers spent more time on planning and organizing whereas, middle level managers spend more time on leading the group directing and controlling. Similarly the lower level spend more time on organizing themselves to execute the task. The primary functions of management are generally grouped under five heads- Planning, organizing, staffing, directing and controlling (Figure 1 as proposed by Koontz O’ Donnel)

Different thinkers explained the functions in different ways. Luther Gullick discussed the function of management through the acronym –POSDCoRB which relate to 

P- Planning 

O-Organizing 

S-Staffing 

D-Directing 

Co-Coordinating 

R-Reporting 

B-Budgeting 

According to Gullick, managers generally perform these functions in the course of their work.Henry Fayol has listed the acronym POCCC as the functions of management. According to him, managers perform five functions. They are

P- Planning 

O-Organizing 

C-Coordinating 

C-Controlling 

C-Commanding 

In general, the primary functions of management are categorized into five functions - Planning, Organizing, Staffing, Directing and Controlling. According to management thinkers, the controlling function includes coordinating, reporting and budgeting. The functions are discussed below.

1. Planning 

Planning is preparation for future action. It relates to an activity which bridges the gap between the present and future. The planning functions starts after the broad organizational objectives are spelt out to decide the future course of action. This is an all pervasive function and hence applies to all the levels of management. The functions includes setting objectives, strategies, policy formulation and the consequent laying down of the procedures and programs for the achievement of objectives. It is future oriented and determines the direction in which the organization is moving. This function involves the ability to foresee the effects of current action in the long run. Planning incorporates both external and internal factors. Some of the external factors include- organizational ability to borrow finances, raw materials, economic environment, advancement of technology, global and national policy etc., while the internal factors include organizational policy, intellectual capital, the financial stability of the organization etc. Planning thus, is a continuous activity and determines the future of the organization.

2. Organizing 

Organizing is related to the structure of an organization with clearly defined lines of authority and responsibility, through which the work is allotted, monitored and coordinated so that each division and department relate to each other to work together for the achievement of organizational objectives. It involves activities like delegation, fixing authority and responsibility for a smooth conduct of work. Thus, it involves the identification of tasks, assigning the tasks, defining and delegating the authority and establishing clear lines of authority and responsibility. The functions also include the blending together of the different factors and actors so that it results in a smooth function in the organization.

3. Staffing 

Staffing relates to finding the right people for the right job in the given structure of the organization. It starts with the design of the job, identifying the job, job analysis, thus, paving the way for the recruiting, selecting, placing the people initially and promoting them at later stage. It also includes the functions of developing the people through training for efficient and effective functioning of their assigned work. Thus, it involves the activity of hiring and retaining the people with skills, competencies, knowledge and right attitude which makes the functions very critical in organizational success.

4. Directing 

This functions involves providing good leadership, communication channels, Motivation and supervision so that employees are able to function efficiently to attain the desired goals. It consists of the process and techniques which issues the required instruction and monitoring the operation for smooth functioning. The managers communicate and transmits the message for smooth flow of work. The organizational experience has enough evidence of miscommunication or improper communication leading to organizational failure across the world. It’s thus, a critical element in the function of direction. Similarly, teams and groups of people require proper guidance from the leaders for effective functioning. Leadership relates to the process of influencing the behavior of people on the job. Leaders motivate the individuals and influence them towards the achievement of individual, group and organizational objectives. Monitoring and supervising the work of the group provides the assurance of the goal of accomplishment in line with the plan. This activity tracks the progress of the groups and provides the confidence to the leader that the directions are being properly carried out.

5. Controlling 

The function of control consists of those activities that are undertaken to influence that there is no deviation in the plan. The control process includes setting of the standards, performance target and measures along with corrective action that is taken at different stages of the control process. This function is always misunderstood and throws up a negative connotation of restricting people in their job. This function aims at checking whether organizational objectives are met and action that could be taken in future as the work is in progress. Normally, the budgets, the audit of records, pay roll of employees, the items of expenditure etc. are common examples of checking deviation. This function provides the leads to the planning function by monitoring and checking the deviations. An organization performs these five functions of management which are closely interrelated, yet distinct from each other. 

MMPC 01 - Management Functions and Organisational Processes - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 001 - Management Functions and Organisational Processes

MMPC-001/TMA/JULY/2022

Note: Attempt all the questions and submit this assignment to the coordinator of your study centre. (Last date of submission for July 2022 session is 31st October, 2022 and for January 2023 session is 30th April, 2023). 

Question No. 1. Briefly describe the functions of management and discuss their importance in the functioning of the organisations.             CLICK HERE 

Question No. 2. Discuss the necessity of having Planning and how it helps organisations. Describe various types of planning and their merits.        CLICK HERE 

Question No. 3. Discuss and describe the importance of Directing as a function of management. Illustrate with examples.        CLICK HERE 

Question No. 4. What are the characteristics of an organizational culture? Briefly discuss how to build sustainable organizational culture including ethical culture with examples.        CLICK HERE 

Question No. 5. Briefly describe and discuss modern theories of leadership and the difference between successful vs. effective leader.        CLICK HERE 

Question No. 5 - MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)

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MMPC 004 - Accounting for Managers

MMPC-004/TMA/JULY/2022

Question No. 5 From the following calculate cash from operations:

Solution:

Question No. 4 - MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)

Solutions to Assignments

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MMPC 004 - Accounting for Managers

MMPC-004/TMA/JULY/2022

Question No. 4. Explain in detail the various contents of an Annual Report.
Solution:

Let‘s look at the contents of an annual report. Figure 1 displays the four broad contents of an annual report, namely, 1) Non-audited information, 2) Financial statement, 3) Notes to the accounts and 4) Accounting policies.

Let‘s understand each of the four broad contents one by one. 

1) Non-audited information 

 The non-audited information is further classified into: 

 a) Narrative items and 

 b) Non-narrative items. 

a) Narrative items Within narrative items in the annual report, following are some of the important statements: Chairman‘s statement, Directors‘ report, Operating and financial review, Statement of corporate governance, Auditors report, Statement of directors‘ responsibilities, Sustainability report and Management Discussion and Analysis. 

i) Chairman‘s statement Chairman‘s statement highlights corporate activities, strategies, researches, labour relations, main achievements, focuses on future goals, growth. In corporate annual report, the chairman‘s statement may or may not always be found but may be provided to shareholders as a separate document. Chairman‘s statement may concentrate on economic condition of the industry to which the corporate unit belongs and the economy of the country. It also provides an overview of the trading year, a personalized overview of the company‘s performance over the past year and usually covers strategy, financial performance and future prospects.

ii) Directors‘ Report Its principal objective is to supplement the financial information with other information consider necessary for a full appreciation of the company‘s activities. It includes:

A description of the principal activities of the company 

 A fair review of the current and future prospects of the business 

 Information on the sale, purchase or valuation of assets Recommended dividends 

 Employee statistics  

 Names of directors and their interests 

 Details of political or charitable donations

iii) Operating and financial review 

 This is a statement in the annual report which provides a formalized, structured explanation of financial performance 

 The operating review covers items such as operating results, profit and dividend 

 The financial review discusses items such as capital structure and treasury policy 

iv) Statement of corporate governance Statement of corporate governance includes a statement of corporate governance procedures and compliance, information on board composition, statements on the company's performance, and information about compliance and conformance with best practices for good corporate governance. Corporate Governance focuses on a company‘s structure and processes to ensure transparent and responsible corporate behaviour. Corporate governance is a dynamic process. Effective corporate governance not only reduces the agency costs incurred due to division of ownership but it helps in saving of time and resources of investors. On one hand, poor corporate governance practices enhance the agency costs and reduce firm valuation whereas on the other, good corporate governance facilitates independent supervision of company‘s management and encourages effective decision making which enhances firm value, reputation, credit rating, improves overall performance, lowers cost of capital, improves access to capital markets and increases competitive edge.

v) Auditor‘s report The independent and external audit report is typically published with the company's annual report. The auditor's report is important because banks and creditors require an audit of a company's financial statements before lending to them. The auditors shall make a report to the members of the company. It is the obligatory duty of the directors to get the accounts of company audited every year by qualified auditors. An auditor is appointed by the shareholders of a company to audit accounts and as such, auditor addresses the report to the shareholders of the company on the accounts audited by him. It is the duty of the board of directors to attach the auditor‘s report to the balance sheet so as to provide a copy of auditor‘s report to every member of company.

vi) Statement of directors‘ responsibilities It is an important statement in the annual report and is prepared in accordance with section 135 (5) of the Companies Act, 2013.

vii) Sustainability report A sustainability report is a report published by a company about the economic, environmental and social impacts caused by its everyday activities. A sustainability report is the key platform for communicating sustainability performance and impacts – whether positive or negative.

Apart from the broader overview of sustainability, the Sebi (Securities and Exchange Board of India) has developed new norms, voluntary this year (2019-20) and mandatory thereafter, which would apply to the top 1,000 listed entities. The Sebi reporting norms on business responsibility follow the National Guidelines on Responsible Business Conduct, put forth by the ministry of corporate affairs last year. The norms require that businesses conduct themselves with integrity and transparency, provide goods and services in a safe, sustainable manner, and respect the interests of all their stakeholders, which is unexceptionable. The new requirements include disclosure on redressal procedures for complaints/grievances, including on those pending resolution, R&D spends on better environmental and social outcomes, employee skill levels, including of those differently abled, and provision for insurance, maternity, paternity and day-care facilities. But also required now are routine disclosures upfront of energy consumed to turnover, ditto for water, and, more generally, the percentage of recycled or reused input materials to total raw material usage (by value) is also to be revealed. Gender diversity should get more attention in the reporting, and a board committee, rather than just a board member, should be accountable for ESG reporting. Businesses are, of course, accountable to their shareholders. But, increasingly, consumers, employees and investors also seek sustainability, social responsibility and good governance in corporate performance. ESG — short for environment, social and governance — is quite the rage among large investors. That means that companies must disclose their governance processes, social practices and environmental impacts. That is what Sebi wants.

viii) Management Discussion and Analysis This section is perhaps one of the most important sections in the whole of Annual Report. The most standard way for any company to start this section is by talking about the macro trends in the economy. They discuss the overall economic activity of the country and the business sentiment across the corporate world. If the company has high exposure to exports, they even talk about global economic and business sentiment. Following this, the companies usually talk about industry trends and what they expect for the year ahead. This is an important section as we can understand what the company perceives as threats and opportunities in the industry. Remember, until this point, the discussion in the Management Discussion and Analysis is broad-based and generic (global economy, domestic economy, and industry trends). However, in the future, the company would discuss various aspects related to its business. It talks about how the business had performed across various divisions, how it fares compared to the previous year, etc.

b) Non-narrative items Within non-narrative items in the annual report are: Financial highlights, highlights of the year and shareholder information. 

i) Financial highlights Financial highlights include year on year comparison of revenue from operations, EBITDA (Earnings before Interest, Tax, Depreciation and Amortization), ROE (Return on Equity) and PAT (Profit after Tax) for the financial years 2018-19 and 2019-20.

ii) Highlights of the year It includes other than financial highlights, for instance, launching new products, brands, opening new showrooms and the like.

2) Financial Statements There are three financial statements discussed in the annual report, namely, 

a) Balance Sheet, 

b) Profit and Loss account and 

c) Cash flow statement 

a) Balance Sheet A balance sheet is a statement of the resources owned and controlled by a business at a single point in time. It gives a snapshot of assets, liabilities and capital at a point in time. It provides information about the company‘s funds and how they are used in the business. Balance sheet which is also known as position statement provides a bird‘s eye view on company‘s financial position as well as condition. This statement indicates whatever company has and whatever company owes. The excess of assets over liabilities is known as owners equity/shareholders funds. 

b) Profit and loss account The Profit and Loss Account is a statement which shows total business revenue less expenses. The P&L account quantifies and explains the gains or losses of the company over the period of time bounded by two balance sheets. It provides a summary of the year‘s trading activities: revenue from sales (turnover), business cost, and profit or (loss). The profit and loss account which is also known as Income Statement indicates net profits earned by company during current financial year. Income statement also indicates profits available for distribution and appropriation after meeting tax liabilities. Profit and Loss Appropriation Account or Retained Earnings Account is also submitted with profit and loss account which indicates appropriations made during the period. 

c) Cash flow statement 

 This is a statement which shows the flow of cash into and out of the business

 It is not the same as a profit and loss account 

 The cash flow statement only records movements of cash and, for example, does not include credit sales or purchases until such time as cash actually flows  

 This statement became mandatory because of some high profile business failures of the 1980s/90s - these were companies that, in terms of the P&L, were profitable but were short of cash to pay their debts  The cash flow statement should not be confused with a cash flow forecast. The former is historical whereas the latter is a forecast about the future

3) Notes to the accounts Provides a more detailed analysis of some of the entries in the accounts including: 

 Disclosure of accounting policies used (e.g. depreciation) and any changes to these policies 

 Inventories 

 Sources of turnover from different product segments 

 Details of fixed assets and share capital 

 Directors‘ emoluments (how much the Directors earned) 

 Earnings per share In this part, we will look at some of the important notes to the accounts sourcing the same from Titan Company‘s Annual Report 2019-20. 

i) Depreciation Depreciable amount for assets is the cost of an asset, or other substituted for cost, less its estimated residual value. Depreciation is calculated on the basis of the estimated useful lives using the straight line method and is generally recognized in the statement of consolidated profit and loss. Depreciation for assets purchased / sold during the year is proportionately charged from/up to the date of disposal. Free hold land is not depreciated. 

ii) Inventories Inventories [other than quantities of gold for which the price is yet to be determined with the suppliers (Unfixed gold)] are stated at the lower of cost and net realizable value determined on an item-by-item basis. Cost is determined as follows: 

a) Gold is valued on first-in-first-out basis. 

b) Stores and spares, loose tools and raw materials are valued on a moving weighted average rate. 

c) Work-in-progress and finished goods (other than gold) are valued on full absorption cost method based on the moving average cost of production. 

d) Traded goods are valued on a moving weighted average rate/ cost of purchases.

iii) Revenue from operations In this note, sources of revenue from different product segments like watches, jewellery, eyes wear and others are stated.

iv) Details of fixed assets and share capital Fixed assets: Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated at cost less accumulated depreciation and accumulated impairment losses. Freehold land is not depreciated. Property, plant and equipment are carried at cost less accumulated depreciation and impairment losses, if any. The cost of property, plant and equipment comprises its purchase price/ acquisition cost, net of any trade discounts and rebates, any import duties and other taxes (other than those subsequently recoverable from the tax authorities), any directly attributable expenditure on making the asset ready for its intended use, other incidental expenses and interest on borrowings attributable to acquisition of qualifying property, plant and equipment up to the date the asset is ready for its intended use. Machine spare parts are recognized in accordance with this Ind AS (Indian Accounting Standard) when they meet the definition of property, plant and equipment; otherwise, such items are classified as inventory. Subsequent expenditure on property, plant and equipment after its purchase / completion is capitalized only if such expenditure results in an increase in the future benefits from such asset beyond its previously assessed standard of performance. The estimated useful life of the tangible assets and the useful life are reviewed at the end of the each financial year and the depreciation period is revised to reflect the changed pattern, if any. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the statement of consolidated profit and loss.

v) Directors’ emoluments The information required under Section 197 of the Act read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are given below:

The above snapshot shows the ratio of the remuneration of each director to the median remuneration of the employees of the company and the percentage increase in remuneration of each Director, Managing Director, Chief Financial Officer and Company Secretary in the financial year. 

vi) Earnings per share Basic Earnings Per Share (‗EPS‘) is computed by dividing the net profit attributable to the equity shareholders by the weighted average number of equity shares outstanding during the year. Diluted earnings per share is computed by dividing the net profit by the weighted average number of equity shares considered for deriving basic earnings per share and also the weighted average number of equity shares that could have been issued upon conversion of all dilutive potential equity shares. Dilutive potential equity shares are deemed converted as of the beginning of the year, unless issued at a later date. In computing diluted earnings per share, only potential equity shares that are dilutive and that either reduces earnings per share or increases loss per share are included.

4) Accounting policies 

 Companies must describe the accounting policies they use in preparing financial statements 

 Companies have a choice of accounting policies in many areas such as foreign currencies, goodwill, pensions, sales and stocks 

 As different accounting policies will result in different figures it is necessary to state the policy that was used so that readers of the accounts can make an informed judgment about performance 

 It is also important to state the effect of any changes in accounting policies – restating prior year numbers where this is materially significant. 

Question No. 3 - MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)

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                            MBA and MBA (Banking & Finance)

MMPC 004 - Accounting for Managers

MMPC-004/TMA/JULY/2022

Question No. 3. What is CVP analysis? Does it differ from break even analysis? How is break-even point calculated?

Solution:

The Cost-Volume-Profit (CVP) analysis is an attempt to measure the effect of changes in volume, cost, price and products-mix on profits. You will appreciate that while these variables are interrelated, each one of them, in turn, is affected by a number of internal and external factors. For instance, costs vary due to choice of plant, scale of operations, technology, the efficiency of workforce and management efficiency etc. 

Also, the cost of inputs bought externally is affected by market forces. While many wide-ranging factors influence costs and profits, the largest single variable affecting them in the short run is the volume of output. Hence, the CVP relationship acquires a vital significance for the manager facing a wide spectrum of short-run decisions like: what are the most profitable and what are the least profitable products? How does a reduction in selling prices affect profits? How does volume or product mix affect product costs and profits? What will be the break-even point if volume and costs change? How will an increase in wages and/or other operating expenses affect profit? What will be the effect of plant expansion on costs, profit and volume of sales? Answers to all such questions will have to be formulated in a cost-benefit framework, and CVP analysis will offer the technique for doing it.

You may now be getting ready to comprehend the CVP concept. You will observe that profits are a function of the interplay of costs, prices, and each one of them is relevant to profit planning. The variance between actual and budgeted profit arises due to one or more of the following factors: selling price, volume of sales, variable costs, and fixed costs. 

You will also appreciate that these four factors, which cause deviations in planned profits, differ from each other in terms of controllability by management. It is evident that selling prices largely depend upon external forces. Costs, of course, are more controllable. But they pose a problem of measurement. This is more so when a firm manufactures two or more products. Nevertheless, knowledge of fixed and variable costs is essential if costs are to be controlled. Consider a tenuous cost - volume-profit transit.

A break-even analysis is a financial calculation that weighs the costs of a new business, service or product against the unit sell price to determine the point at which you will break even. In other words, it reveals the point at which you will have sold enough units to cover all of your costs. At that point, you will have neither lost money nor made a profit.

How Break-Even Analysis Works
A break-even analysis is a financial calculation used to determine a company’s break-even point (BEP). It is an internal management tool, not a computation, that is normally shared with outsiders such as investors or regulators. However, financial institutions may ask for it as part of your financial projections on a bank loan application.
The formula takes into account both fixed and variable costs relative to unit price and profit. Fixed costs are those that remain the same no matter how much product or service is sold. Examples of fixed costs include facility rent or mortgage, equipment costs, salaries, interest paid on capital, property taxes and insurance premiums.
Variable costs rise and fall according to changes in sales. Examples of variable costs include direct hourly labor payroll costs, sales commissions and costs for raw material, utilities and shipping. Variable costs are the sum of the labor and material costs it takes to produce one unit of your product.
Total variable cost is calculated by multiplying the cost to produce one unit by the number of units you produced. For example, if it costs $10 to produce one unit and you made 30 of them, then the total variable cost would be 10 x 30 = $300.
The contribution margin is the difference (more than zero) between the product’s selling price and its total variable cost. For example, if a suitcase sells at $125 and its variable cost is $15, then the contribution margin is $110. This margin contributes to offsetting fixed costs.
The average variable cost is calculated as your total variable cost divided by the number of units produced.
In general, lower fixed costs lead to a lower break-even point—but only if variable costs are not higher than sales revenue.
Why Does Your Business Need to Perform Break-Even Analysis?
A break-even analysis has broad uses on its own merit. But it’s also a critical element of financial projections for startups and new or expanded product lines. Use it to determine how much seed money or startup capital you’ll need, and whether you’ll need a bank loan.
More mature businesses use break-even analyses to evaluate their risks in a variety of activities such as moving innovative ideas to production, adding or deleting products from the product mix and other scenarios. One example is in budgeting the addition of a new employee. A break-even analysis will reveal how many additional sales it will take to break even on expenses associated with the new hire.
What Is a Standard Break-Even Time Period?
An acceptable break-even window is six to 18 months. If your calculation determines a break-even point will take longer to reach, you likely need to change your plan to reduce costs, increase pricing or both. A break-even point more than 18 months in the future is a strong risk signal.
When to Use a Break-Even Analysis
Basically, a business will want to use a break-even analysis anytime it considers adding costs. These additional costs could come from starting a business, a merger or acquisition, adding or deleting products from the product mix, or adding locations or employees.
In other words, you should use a break-even analysis to determine the risk and value of any business investment, especially when one of these three events occurs:
1. Expanding a business
Break-even points (BEP) will help business owners/CFOs get a reality check on how long it will take an investment to become profitable. For example, calculating or modeling the minimum sales required to cover the costs of a new location or entering a new market.
2. Lowering pricing
Sometime businesses need to lower their pricing strategy to beat competitors in a specific market segment or product. So, when lowering pricing, businesses need to figure out how many more units they need to sell to offset or makeup a price decrease.
3. Narrowing down business scenarios
When making changes to the business, there are various scenarios and what-ifs on the table that complicate decisions about which scenario to go with. BEP will help business leaders reduce decision-making to a series of yes or no questions.

Importance of Break-Even Analysis

• Manages the size of units to be sold: With the help of break-even analysis, the company or the owner comes to know how many units need to be sold to cover the cost. The variable cost and the selling price of an individual product and the total cost are required to evaluate the break-even analysis.
• Budgeting and setting targets: Since the company or the owner knows at which point a company can break-even, it is easy for them to fix a goal and set a budget for the firm accordingly. This analysis can also be practised in establishing a realistic target for a company.
• Manage the margin of safety: In a financial breakdown, the sales of a company tend to decrease. The break-even analysis helps the company to decide the least number of sales required to make profits. With the margin of safety reports, the management can execute a high business decision.
• Monitors and controls cost: Companies’ profit margin can be affected by the fixed and variable cost. Therefore, with break-even analysis, the management can detect if any effects are changing the cost.
• Helps to design pricing strategy: The break-even point can be affected if there is any change in the pricing of a product. For example, if the selling price is raised, then the quantity of the product to be sold to break-even will be reduced. Similarly, if the selling price is reduced, then a company needs to sell extra to break-even.

Components of Break-Even Analysis

• Fixed costs: These costs are also known as overhead costs. These costs materialise once the financial activity of a business starts. The fixed prices include taxes, salaries, rents, depreciation cost, labour cost, interests, energy cost, etc.
• Variable costs: These costs fluctuate and will decrease or increase according to the volume of the production. These costs include packaging cost, cost of raw material, fuel, and other materials related to production.

Uses of Break-Even Analysis

• New business: For a new venture, a break-even analysis is essential. It guides the management with pricing strategy and is practical about the cost. This analysis also gives an idea if the new business is productive.
• Manufacture new products: If an existing company is going to launch a new product, then they still have to focus on a break-even analysis before starting and see if the product adds necessary expenditure to the company.
• Change in business model: The break-even analysis works even if there is a change in any business model like shifting from retail business to wholesale business. This analysis will help the company to determine if the selling price of a product needs to change.

Benefits of Break-even analysis

• Catch missing expenses: When you’re thinking about a new business, it’s very much possible that you may forget about a few expenses. Therefore, a break-even analysis can help you to review all financial commitments to figure out your break-even point. This analysis certainly restricts the number of surprises down the road or at-least prepares a company for them.
• Set revenue targets: Once the break-even analysis is complete, you will get to know how much you need to sell to be profitable. This will help you and your sales team to set more concrete sales goals.
• Make smarter decisions: Entrepreneurs often take decisions in relation to their business based on emotion. Emotion is important i.e. how you feel, though it’s not enough. In order to be a successful entrepreneur, decisions should be based on facts.
• Fund your business: This analysis is a key component in any business plan. It’s generally a requirement if you want outsiders to fund your business. In order to fund your business, you have to prove that your plan is viable. Furthermore, if the analysis looks good, you will be comfortable enough to take the burden of various ways of financing.
• Better pricing: Finding the break-even point will help in pricing the products better. This tool is highly used for providing the best price of a product that can fetch maximum profit without increasing the existing price.
• Cover fixed costs: Doing a break-even analysis helps in covering all fixed cost.

CVP analysis is important because it is used to understand the effects of differing levels of activity on the financial results of a business, reports the global body for accounting professionals, the ACCA. Specifically, it helps to determine a company's break-even point. This is the level of sales where the company will not incur a loss, yet not make a profit.

To calculate the break-even point, you must first calculate the contribution margin. The contribution margin is a company's sales less its variable expenses. Then, divide the company's fixed costs by the contribution margin. This will give you the company's break-even point in total dollars of sales. the formula looks like this:

FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)

If you want to calculate the break-even point in units sold, replace the contribution margin in the denominator with the contribution margin per unit. The contribution margin per unit is calculated as the sales price less the variable cost per unit.

Break Even Example

Suppose Acme Cereal Inc is considering introducing a new breakfast bar, called Cerealicious. The company wants to know whether this new product will be worth the investment, so the product development team sets about finding the break even point.

Fixed Costs = $3,000 (for the month)
Variable Costs = $0.50 (per bar produced)
Sales Price = $1.00 (per bar)

As a reminder, the formula is: Fixed Costs ÷ (Sales price per unit – Variable costs per unit)

$3,000/($1.00 – $0.50)
$3,000/0.50
=6,000 units

This means Acme needs to sell 6,000 bars of Cerealicious in a month to reach the break-even point.