Benefits of Breakeven Analysis

The main advantage of breakeven analysis is that it explains the relationship between
cost, production volume and returns. It can be extended to show how changes in fixed
cost-variable cost relationship, in commodity prices, or in revenues, will affect profit
levels and breakeven points. Breakeven analysis is most useful when used with partial
budgeting or capital budgeting techniques. The major benefit to using breakeven analysis
is that it indicates the lowest amount of business activity necessary to prevent losses.
Limitations of breakeven analysis
• It is best suited to the analysis of one product at a time
• It may be difficult to classify a cost as all variable or all fixed
• There may be a tendency to continue to use a breakeven analysis after the cost
and income functions have changed
Advantages of standard costing
The main advantages of operating with a standard costing system in place are that the
standard costs can be used:
• To help with decision making, for example as a basis for pricing decisions
• To assist in planning, for example to plan the quantity and cost of the resources needed
for future production
• As a mechanism for controlling costs: standard costs can be compared with actual costs
(by calculating variances) so that action can be taken when appropriate.
In addition there may be other benefits to setting up and using a standard costing system:
• The preliminary examination of current production techniques and resources may reveal
hidden inefficiencies and unnecessary expenditure.
• The fact that costs are to be monitored may increase the cost consciousness of the
workforce (and the management).
• The system lends itself to exception reporting. This is a technique where results are only
reported when they are outside a predetermined range so that action can be taken. For
example a company may decide that only when costs are more than 2% away from the
standard should the variances be reported.
There are therefore a variety of arguments for developing and using a standard costing
system. The main uses that a particular organization intends to make of the system will
determine how it goes about setting standards.