Differentiate between accounting breakeven point and financial breakeven point.

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The major differences between accounting breakeven point and financial breakeven point are given below −

Accounting breakeven point

  • It is the number of units sold to cover costs.

  • It is an easy method.

  • Cost per unit, fixed cost and variables cost are required to calculate the breakeven point.

  • Accounting breakeven point = (TFC/PPU)-VC (Where TFC= Total fixed cost, PPU = price per unit, VC = variable cost

  • Zero operating margin is calculated.

Financial breakeven point −

  • It is the number of units sold to cover costs.

  • It is an easy method.

  • Cost per unit, fixed cost and variables cost are required to calculate the breakeven point.

  • Accounting breakeven point = (TFC/PPU)-VC (Where TFC= Total fixed cost, PPU = price per unit, VC = variable cost

  • Zero operating margin is calculated.

Financial breakeven point −

  • It estimates earning level at which Earnings Per Share (EPS) equals to Zero.

  • It is relatively a complicated method.

  • For calculation, Earnings Before Income and Tax (EBIT) is considered as earning.

  • Financial breakeven point = (PD/1-TR)+ IE (Where, PD = preferred dividends, TR= Tax rate, IE = Interest Expenses)

  • Zero net income is calculated.

  • Different measurements are required to calculate.

raja
Published on 25-Sep-2020 16:22:53
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