The Formula, Break even Point

Basically, the formula for breakeven point in economics and accounting is similar but the only difference is that accounting does not consider opportunity cost in the calculation of breakeven point while economic breakeven point does considers opportunity cost during the calculation of breakeven point. Breakeven point is that point at which the expenses of the organization are equal to the revenue of the organization and organization is not able to generate profit at this point because the amount of expenses is equal to the amount of revenue. Total expenses include both variable expenses as well as fixed expenses incurred in order to generate the revenue or sales for the company.

Another difference between accounting breakeven point and economic breakeven point is that accounting breakeven point is achieved when the total cost of sales is equal to the total sales of the company while economic breakeven point is achieved when the total sales of the company is equal to the total recurrent cost of the company.

As far as accounting breakeven point is considered, total expenses are comparatively less as compared to the total expenses in case of economic breakeven point mostly because of the fact that economic breakeven point also includes opportunity cost during the calculation of the breakeven point. Due to inclusion of opportunity cost, total cost in economic breakeven point becomes greater than the total expenses and accounting breakeven point calculation (study, 2019).

Breakeven point analysis helps the management of the company to calculate and examine the margin of safety prevailing in the company on the basis of the revenue collection and related cost. Economic break even analysis and accounting break even analysis both helps to tell that at which level an investment should reach towards the recovering of initial outlay. It is also considered to be margin of safety related analysis (HAYES, 2019).

Another difference between accounting breakeven point and economic breakeven point is that accounting breakeven point is related to a specific financial period while economic breakeven point is not specifically calculated for any specific financial period. Economic breakeven point can be calculated for specific event, department, and other related separate unit. It is also important to understand that accounting break-even point is implemented mostly on the basis of accrual basis of accounting while economic breakeven point is mostly calculated on the actual sales and expenses of the company. This is one of the most significant differences between accounting breakeven point and economic breakeven point. Breakeven point in accounting calculated under the cash basis of accounting is known as cash break-even point but most of the times, accounting breakeven point is calculated under the accrual basis of accounting. It is important to understand that breakeven point for accrual accounting system and cash accounting system would be different because the amount of sales breakeven point would be different in both scenarios. That is why; accounting break-even point depends upon the type of accounting system being used by the organization and most of the organizations use accrual basis of accounting system.

Breakeven point can be calculated in terms of dollars as well as in terms of units. It depends upon the objective of calculating breakeven point. If the complete analysis is in terms of dollars then calculation of breakeven point in terms of dollars is more relevant while if the calculation is in terms of units then calculation of breakeven point in terms of unit’s acknowledgement. Calculation of accounting breakeven point and economic breakeven point is important for the businesses because it helps them to identify the point at which the business will start making profit and it helps them to decide the price for the products and services offered by the company to the potential customers in market. (investinganswers, 2019)

References of The Formula, Break even Point 

HAYES, A. (2019, 04 23). Break-Even Analysis Definition. Retrieved 05 14, 2019, from investopedia: https://www.investopedia.com/terms/b/breakevenanalysis.asp

investinganswers. (2019). Break-Even Point. Retrieved 05 14, 2019, from investinganswers: https://investinganswers.com/dictionary/b/break-even-point

study. (2019). Consider a project with the following data: accounting break-even quantity = 16,000 units; cash... Retrieved 05 21, 2019, from study: https://study.com/academy/answer/consider-a-project-with-the-following-data-accounting-break-even-quantity-16-000-units-cash-break-even-quantity-15-000-units-life-six-years-fixed-costs-180-000-variable-costs-36-per-u.html