12/11/21, 7:43 PM Accounting breakeven point definition — AccountingTools

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April 14, 2021

Accounting Books

What is the Accounting Breakeven Point?

Finance Books

The accounting breakeven point is the sales level at which a business

Operations Books
generates exactly zero profits, given a certain amount of fixed costs that it
must pay for in each period. This concept is used to model the financial
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structure of a business. The calculation of the accounting breakeven point
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is a three-step process, which is:
discounts
*

1. Determine the contribution margin generated by all of the company's

products in aggregate. This is net sales minus all variable costs
associated with those sales (which is at least direct materials and
commissions). Thus, if a business has sales of $1,000,000, direct SUBMIT

materials costs of $280,000, and commissions of $20,000, its

contribution margin is $700,000 and its contribution margin
percentage is 70%.

2. Calculate the total amount of fixed costs that the business incurs in an
accounting period, such as for rent, salaries, and interest expense.
3. Divide the total fixed cost by the contribution margin percentage to
arrive at the breakeven sales point. In our continuing example, this

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12/11/21, 7:43 PM Accounting breakeven point definition — AccountingTools

means that having fixed costs of $500,000 results in a breakeven

sales level of $714,285 (calculated as $500,000 of fixed costs divided
by the 70% contribution margin).

If we assume that the "accounting" breakeven point refers to the accrual

basis of accounting, then the fixed cost portion of the breakeven calculation
should include all expense accruals normally required under the accrual
basis of accounting. Alternatively, you could develop a "cash" breakeven
point where the fixed cost portion of the calculation only includes costs
recorded under the cash basis of accounting.

The Difference Between Accounting Breakeven and

Cash Breakeven

If you were to develop a separate accounting breakeven point and a cash

breakeven point for a business, they would likely reveal somewhat different
sales breakeven points, since the timing of expense recognition is different
under the two methods. Generally speaking, the accounting breakeven
point would be less likely to change from period to period than the cash
breakeven point, since the accrual basis tends to result in the more
consistent recognition of sales and expenses from period to period. Over
the long term, there would be only a minimal difference between the
accounting and cash breakeven points, since any differences tend to
cancel each other out over time.

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