Breakeven Theory

A budget is an estimation of the revenue and expenses of a business over a specified period of time. Zero budgeting is when departments are given no budget, but have to ask their managers for money based on what they will need for that year. Allocated budgeting is the opposite; this is when money is allocated for a budget and divided according to how many departments and people are working there. The budget is usually set at the start of the financial year and the business must ensure each month that it is sticking to its predictions. If sales are higher than budgeted, this is likely to be positive for the business, but if costs are higher this could lead to lower profits or even problems with paying the business’s expenses.
There are two variances. If sales revenues are higher or costs are lower, this variance is known as favourable. If sales are lower or costs are higher than expected, this variance is known as adverse.
Firms spend money making their products. These are called costs. There are two types of costs involved in breakeven, these are variable costs and fixed costs. Variable costs are costs that change according to output. These costs change directly according to how many products are made. Fixed costs are costs that do not change, regardless of the number of goods that are sold or services that are offered. These costs include rent, insurance and salaries. These costs must be paid.
Sales revenue is money coming in from the sales of goods or services. Sales can be either cash sales or credit sales. Breakeven is the point at which a business’s costs equal their sales. This point is known as breakeven and shows how many products they need to produce and sell, or services they need to offer, to get to the point where they are neither making a profit or loss. The breakeven point can be worked out as follows:
Break Even Point = Fixed Costs ÷ Unit Contribution
The benefits of break-even is it can provide very quick results for display either by hand or