Introduction to Accounting - Essay Example

Fixed costs are the costs that do not change even if sales of a product changes. These costs are incurred even if there no sales made. On the other hand, the cost will not change even when sales made are very high. An example is the printer that prints newspapers. The cost of producing incurred con the printer when it prints 10 newspapers is the same as the cost for printing 1000 newspapers. Therefore, the cost of producing newspapers in terms of printer’s cost is a fixed cost. Contribution is the amount that remains after all variable costs have been subtracted from the sales revenue.

Contribution caters for the fixed costs and it leads to the net income. Contribution mainly deals with the profit made by selling the products. It is very important because it helps in determining the amount of goods that need to be sold in order to recover the costs incurred during production. For example, it helps in determining the amount of whisky products that have to be sold in order to get the cost of producing the whisky. This is a point in production that occurs when the amount of cost is equal to the amount of the total sales of the products.

Although many businesses are after making profits, there are some points when the businesses neither undergo loss nor get profits. This is the breakeven point of the business. Graphically, breakeven point is achieved when the total cost curve meets the total revenue costs. An example of breakeven point is when the cost of producing whisky is equal to the amount achieved from the sales of the whisky. This means that the company neither gets profit nor loss. Breakeven point is important in recognizing the relevance of variable costs and the fixed costs.

Despite this importance, breakeven point cannot be overstated since it cannot help in business decision making. This is a resource that is scarce and its supply is very low. Limiting factor is also known as the principle budget factor.