The 3-Step Approach for Solving Accounting Problems

3-Step Approach for Solving Accounting Problems

Accounting is not an easy-to do subject for many students. It poses threats to students in its various learning aspects. Online Accounting Tutors train you in easy subject learning via their tricks and tips.

Solving Accounting problems is a tremor to students due to the technicalities involved and the complexity of the key terms used in the subject. Here are some methods for you to follow and survive in Accounting classes and to be successful in solving Accounting problems.

1. Understand the material

Understand what the problem is about and what you are asked to do in the problem. Do practice exercises for understanding the problem at the first sight and go step by step to solve the problem.

2. Keep the key terms on your finger tips

Accounting has a technical language of its own- to know which you need to master the key terms of the subject. Some of them may be over lapping in meaning and so it is good to make flashcards and use them to keep the terms in memory without confusion. Accounting problems need to be understood based on your knowledge of the key terms of the subject and so it is good that you keep them ready in mind before solving problems.

3. Underline the essential parts of the problem

Some Accounting problems are lengthy and can run to a page to read. Reading and comprehending the material takes lots of time .Practice makes you read problems without losing focus and it is good that you underline their essential parts with a pencil as you go on reading. When you go back on the problem, you will find it easy to do step by step.

Keeping an eye on the time you take for solving a problem is important as otherwise you may not be able to complete the paper with success. A single problem can swallow even two hours of your exam time.

Accounting Homework Help online teaches you more methods for successful problem solving in Accounting areas.

Are Accounting Skills Necessary for Job Specialties?

Accounting Skills

Accounting is the basic tool for facilitating the growth of a business since it throws light on how the business flourishes in the market and how far it can survive in its field. Naturally, Accounting is considered to be the language of business and knowing its fundamentals helps various categories of people in different manners.

Are Accounting skills necessary for job specialties?

Accounting knowledge is essential for many professions. Any business man needs the knowledge of basic principles of Accounting to run his business. Accounting knowledge is essential for secretaries to manage check books and orders of their company. Auditors need lots of Accounting knowledge to check the records of a business or organization and produce reports in turn.

Executives need Accounting knowledge to evaluate the success of their organization based on the past and present Accounting statements. With an Accounting degree, you can enter government services or become budget analysts, financial experts and system professionals. With trends like frequent tax law changes, increased government regulations and computer evolution, you can make a dynamic career with Accounting knowledge.

Is Accounting learning easy?

Accounting learning proves tough if you miss the fundamental skills in the subject or basic   computational skills. And also, if you are not sure of the Accounting principles or problem solving strategies, you are sure to be in a mess. Online Accounting Tutors are the right choice for you in this matter since they teach you from the scratch and make you competent in all areas of subject learning through their individualized tutoring methods.

Make Accounting homework hassle free through online help

Accounting homework may swallow many of your study hours if you are not set in the right tune for solving problems or writing reports. Accounting Homework Help online makes your job easy via expert solutions from tutors who are used to the challenges of the subject day in and day out.

Seek online tutoring help for easy and hassle free Accounting learning and top the class with fantastic scores in the subject.

How to Make Accounting Problems Error Free?

Accounting Problems

Accounting is a subject that tries your patience many times with its calculations and entries which pose threats once you miss them. Without filling the columns sensibly, you cannot arrive at final outputs in Accounting problems and thus it is mandatory on your part to look into your entries with caution to save time and reach unto the final answers for Accounting questions.

Here are some errors you commit while solving Accounting questions

Error of omission: If you miss an entry by mistake, you may not arrive at the final answer and will be in a big mess.

Error of reversal: If you enter a transaction in the debit column instead of credit, then you will be in the wrong direction and you need to go through the entries right from the beginning.

Error of principle: Suppose you apply a wrong Accounting principle for the question, the answer proves to be wrong and your approach is at fault.

You need to learn Accounting principles and also techniques for proper entries to avoid such errors and do Accounting problems without struggle. Online Accounting Tutors help you greatly in this matter with their knowledge and strategies.

Is Accounting homework help a must for students?

Accounting is a subject that involves logical thinking and its understanding is based on the knowledge of Accounting terms. It involves many terms which have unique explanations with regard to the subject. Wihtout having a fundamental knowledge of all these terms, acing Accounting is a tough job. Accounting homework help is the only way to get over struggles in understanding Accounting terms, principles and standards without fault.

Further, Accounting homework is time consuming and may lead you to a maze once you miss entries in their proper columns. It is better to seek expert help in areas of difficulty and waltz through Accounting problems with suitable solutions from tutors of expertise and experience.

Learn Accounting via online tutors to avoid careless errors in doing problems and to score well in the subject.

Do You Know Key Accounting Skills?

Accounting homework help

Accounting is a subject which has great scope for varied career opportunities. It is not that Accounting knowledge is applicable only to business world but it is also applied in varied fields  like schools, colleges, charitable institutions and many such organizations. An accountant has great scope for a bright career with handsome salary packages.

What is Accounting?

Accounting is a subject that records the financial transactions of a business or an institution in terms of income, profit and loss and explains these factors through statements and reports. Income statements, profit and loss statements and balance sheets are the key areas of Accounting learning. An accountant has the duty to maintain records of all reports and statements for hassle free management of a business or an organization.

What are the major Accounting skills?

Numerical abilities, retention powers, devoted concentration, attention to details and precise calculations are the key skills that improve the potentiality of an accountant and pave way for his success. Students who have taken Accounting as their course of study have to focus on these skills for scoring high in Accounting homework and tests. Online tutors with their expert Accounting skills can lead students in the right direction for gathering all these skills.

When do students find Accounting tough?

When students lack in fundamental mathematical abilities or are not able to think logically about Accounting concepts, they fish in troubled waters and feel the need for a supporting hand. Further, they are puzzled by numbers in balance sheets and financial statements. Accounting homework help from virtual tutors can resolve such learning issues and help students out of their crucial Accounting hours.

Do students need Accounting assignment help online?

Students may get confused on learning chapters which are interrelated. Once they miss a thread, they won’t be able to catch up with the assignment topics. Same way, Accounting terms may not be easy for every student. Accounting assignment help online is the panacea for tackling such issues as students feel assured of their successful Accounting assignment scores through such a resource.

Learn Accounting through virtual tutors for bright scores and deep subject knowledge so as to grasp good opportunities in future when you enter the career world.

Top 5 Apps That Make Accounting Easy To Learn

Anyone who is new to accounting is sure to know how hard it is to adjust one’s ideas and master this subject that is vastly different from math. It isn’t quite as easy to learn as other subjects and more often than not students struggle to cope with it and perform poorly in exams. However, there are a few apps that have been designed to help students learn accounting better and master the subject with ease. In fact, most of the online accounting tutors recommend that students use these apps to learn on a regular basis. Read on to learn about the top accounting apps that can help you grasp the nuances of the subject better.


#App 1: iFinance

This app is extremely useful for students in class as it provides a financial tool kit that helps them work with their problems. Calculations become very easy with this app and students can go about with their problems in a confident manner. In fact, this app is very useful to users who wish to work on their financial investments too!

#App 2: My accounting teacher

In case you find it way too difficult to understand what is being taught in class, this app can truly be your messiah. Whatever be your problem, you can use this app to understand the topic at hand and work on it with ease. In fact, it is one of the best sources for accounting homework help there is!

#App 3: CurrencyGo

This is yet another interesting app that helps students with currency conversion rates and currency conversion charts. Video tutorials, multiple data sources support and several advanced and important features make this app a must have in every accounting class. With excellent reviews and being free of cost, this app is becoming popular by the day.

#App 4: FAR Notes – Wiley CPA Exam Review Focus Notes On-the-Go: Financial Accounting and Reporting

Almost every accounting student attempts the CPA and FAR Notes from Wiley CPA is perhaps one of the best apps to help you review your Financial Accounting and Reporting paper on the go. Specifically made for CPA aspirants, this app is the best when it comes to reviewing FAR concepts and has more than 100 study cards and interesting features like keyword search and custom notes.

#App 5: CLEP Financial Accounting Exam Prep / Practice

This app is specifically designed for the CLEP exam and has around 118 questions to help students prepare for the CLEP. The app covers every topic that the CLEP focuses on and is very helpful for those taking up accounting in college too as it serves as an introductory review package for beginners. Practise tests, refreshers and course materials too available in the app and this is a must have for CLEP aspirants.


With technology playing an increasingly important role in modern day education, it is important to accept and welcome it with open arms. Apps are the latest study aids that students are relying on to review concepts learnt in class and when it comes to subjects like accounting, they serve as the best accounting assignment help and homework help a student could ask for!

9 Things You Need To Know About Financial Statements

Financial StatementEvery business owners, company investors and board of directors would like to see how their company performing financially. A need for preparing financial statements becomes a routine part for any organization. These financial statements tell business owners, companies board of directors a true picture about the health of their organization. Therefore, interpreting and understanding these financial statements becomes important on the part of investors, owners and companies board of directors.

What is Financial Statements?

Financial statements are formal record of the financial activities and position of a business, person, or any organization or a legal entity. The financial activities are presented in a structured manner which is easy to read and understand by any individual. The key financial information’s are recorded either on:

  • Income Statement
  • Balance Sheet
  • Statement of Cash Flow

In this article, I will explain you what the financial statements have to offer and how to use them to work in your favor.

  1. Business Investor and Financial Analyst all use Balance Sheet, Income statement and Statement of cash flow before making any financial decision. These statements truly reflect the financial health of any organization. The other statements such as statement of owner equity, retained earnings are important too but not critical. Investors can refer them also to make their financial decision.
  2. The financial statements are widely used to develop a score card to help business owner to compare the score card with actual and make any decision if there is any variance between the score card and actual results. Financial Analyst prepares this score card based on the historical financial information presented by the company in the form of Financial Statements.
  3. The financial statements are widely used by financial analyst to calculate various financial ratios which tend to show an indicator of company present performance and where company is heading in the future. These financial ratios are often presented to board of directors or investors for review.
  4. An active investor likes to see these statements before investing in to company. The auditor of company uses these financial statements to prepare his audit report. The audit report can either be unaudited which is based on mid-year financial statement and final auditor report which is normally completed after the company financial reporting period ends.
  5. If the company owns several other subsidiaries companies, the financial statements can also be prepared as consolidated financial statement where it includes financial information of both parent company and all its subsidiaries companies.
  6. GAAP (generally accepted accounting principles) rules followed by majority of large companies which allow the company to prepare their financial statements according to GAAP. There are basically two conventions, one of historical cost and other one accrual accounting, according to GAAP, the assets are valued at their historical cost whereas revenues and expenses are recoded when they are incurred. Therefore, the investor should really need to understand the statement of cash flow of any organization to see health of the company performance.
  7. Income statement is another statement that cannot be overlooked by any investor. Income statement normally reveals the ability of a business of how much business generates a profit. On the other hand, it does not reflect how much of assets and liabilities business required to generate a profit.
  8. Investor or financial analyst can perform a variance analysis if they have the financial information’s to see some powerful indicator such as profitability trend, sales trend and revenue trend. These variance analyses help the investors to make their financial decisions.
  9. Cash flow statement is the most important financial statement for any business mainly because it focuses solely on changes in cash inflows and outflows over a period of time. This report presents investors a more clear view of a company’s cash flows than the income statement, which can sometimes present skewed results, especially when accruals are required to be maintained according to GAAP


An overview of the above financial statement helps the readers to see a bigger picture of the company. However, the beginning investor should also prepare to learn more about investment qualities before they invest in the companies.

Still confused about financial statement? Connect with online accounting tutor to understand more about financial statements and improve learning before investing.

Guide To Understanding And Setting Up The Chart Of Accounts For Any Business

Chart of accountsChart of accounts are those accounts which are commonly used by medium or large corporation to classify its income statement, balance sheet items in a structured way by department, expenses, incomes, assets and liabilities of an organization.

It is also a powerful tool for any organization to manage its expenses, revenue, assets and liabilities in order to understand the overall financial health of the organization. Normally all the charts of account run using accounting software which aggregate the entity financial information. The information can be sorted by department for any time frame.

Each account in the chart of accounts is typically assigned a unique number by which it can be identified. The unique number generally starts from numerical number from 1-5 where:

1 Represent Current Assets

2 Represent Current Liabilities

3 Represent Operating Incomes

4 Represent Cost of Goods Sold

5 Represent Operating Expenses

How to set up the chart of accounts?

Business owners can set up their business chart of accounts as shown below. As you can see in the table below, each account is assigned a unique number which is 5 digits long. It is the industry standard however, the business can shorten or make longer number as they wishes.

Assets Side of Balance Sheet (account numbers start with 1)

Current Assets

10100 Cash – Regular Checking

10200 Cash – Payroll Checking

10600 Petty Cash in hand

12100 Accounts Receivable

12500 Provision for bad debt

13100 Inventories

14100 Supplies

15300 Prepaid Insurance

Fixed Assets:

17000 Land

17100 Buildings

17300 Equipment

17800 Vehicles

18100 Accumulated Depreciation – Buildings

18300 Accumulated Depreciation – Equipment

18800 Accumulated Depreciation – Vehicles

Liabilities Side Of Balance Sheet (account numbers start from 2)

Current Liabilities:

20110 Notes Payable- Line#1

20210 Notes Payable -Line #2

21000 Accounts Payable

22100 Wages Payable

23100 Interest Payable

24500 Unearned Incomes

Long-term Liabilities

25100 Mortgage Loan Payable

25600 Bonds Payable

25650 Discount Payable

Stockholders’ Equity

27100 Common Stock

27500 Retained Earnings

29500 Treasury Stock

Operating Incomes (account numbers start with 3)

31010 Sales

31022 Sales

32016 Sales

33110 Sales

Cost of Goods Sold (account numbers start from 40000)

41010 Cost of Goods Sold-Line#1 (COGS)

41022 Cost of Goods Sold -Line#2 (COGS)

42016 Cost of Goods Sold -Line#3 (COGS)

43110 Cost of Goods Sold -Line#4 (COGS)

Operating Expenses (account numbers start from 5)

50100 Salaries (Marketing)

50150 Payroll Taxes (Marketing)

50200 Supplies (Marketing)

50600 Telephones (Marketing)

59100 Salaries (others)

59150 Payroll Taxes (others)

59200 Supplies (others)

59600 Telephone (others)

Following the above structure, organization can structure their chart of accounts by expense, by sales department, marketing department, Engineering department and accounting department.

Still confused about how to set up chart of accounts? Connect with expert Online Accounting Tutor right now and learn how to set up chart of accounts for your business.

15 Financial Ratios Every Business Owners Needs to Know

Financial Ratios, Balance Sheet, Income StatementFinancial ratios or accounting ratios are most commonly used by every businesses and companies to determine or evaluate the overall financial health of the business and companies. These ratios are frequently used by financial analyst, managers, shareholders, creditors to find out about the strength and weaknesses of the any organization.

The data used in calculating financial ratios comes from either income statement, profit and loss account, cash flow statement or company balance sheet. These financial ratios allow the companies to compare its financial strength between companies, industries, different time period for one company. These rations are measured always against benchmark set by a company. Without benchmark, these ratios are not so useful. Company have to have some kind of industries benchmark set to compare against its financial ratios.

Most publicly traded companies are required by law to use generally accepted accounting principles (GAAP) for their home country. However, the private companies such as LLC, partnership, private companies are not required to use GAAP method.

There are primarily four main categories of financial ratios that all business used to analyze its data:

  1. Profitability Ratios
  2. Liquidity Ratios
  3. Debt Ratios
  4. Activity Ratios

Let’s elaborate further about all the above financial ratios:

1: Profitability Ratios: These ratios allow companies to measure its ability to make adequate return on sales, total assets and invested capital. In other words, these ratios measure how effectively a company utilizes its resources. Some of the profitability ratios are as follows:

Profit margin ratio: profit margin ratio is calculated by dividing the net income by sales over a reporting period. For example: if company earns net income for $25,000 in a reporting period and its sales amounted to $250,000, the profit margin ratio can be calculated as follows:

Profit Margin Ratio:    Net Income/Sales

Profit Margin:             $25,000/$250,000

= 10%

Return on Investment Assets: Return on investment can be arrived by dividing the Net Income by Total Assets. For example if company Total Assets are $200,000, its return on assets ratio will be as follows:

Return on Assets:   Net Income/Total Assets

ROI:              $25,000/$200,000

= 12.5%

Return on Equity: Return on equity ratio is calculated as dividing the Net Income by Net equity. In other words if company Net equity is worth at $100,000, its Return on Equity ratios will look like as follows:

Return on Equity:   Net Income/ Net Equity

=   $25,000/$100,000

= 25%

Gross Margin Ratio: Gross Margin Ratio can be calculated by dividing the Gross profit by Net Sales. For example: If company gross profit is $50,000 and its net Sales are $250,000. The Gross Profit Margin ration will look like as follows:

Gross Profit Margin Ratio:     Gross Profit/ Net Sales

=    $50,000/$250,000

=     20%

2.Liquidity Ratios: Liquidity ratios determined the company ability to pay it short term obligations normally due within 12 months. There are mainly four liquidity ratio that business or companies would like to find out if they have enough cash to pay its short term debt:

Current Ratio: Current ratio is also known as working capital ratio. The current ratio is calculated by dividing the current assets to current liabilities. For example: If Company net current assets are $150,000 and its net current liabilities are $75,000, The company current ratio will look like as follows:

Current Ratio:         Current Assets/ Current Liabilities

= $150,000/$75,000

= 2 Times

Quick Ratio: Quick ratio is calculated by subtracting Inventory from Current Assets divided by Current Liabilities. For Example: Company Inventory in hand at the end of reporting period amounted to $75,000.

Quick Ratio: Current Assets-Inventory/ Current Liabilities


= 1:1

Cash Ratio: Cash ratios are calculated adding Cash and Marketable Securities divided by Current Liabilities. For Example: If company balance sheet shows cash in hand equal to $100,000 and Its marketable securities on books amounted to $50,000, the its cash ratio should look like this:

Cash Ratio: Cash + Marketable Securities/ Current Liabilities

$100,000 + $50,000/$75,000

= 2 times

Operating Cash Flow: Operating cash flow ratio is calculated as dividing the Operating Cash Flow by Total Debts. For example: company operating cash flow shows $150,000 and Total debt shows $75,000, its operating cash flow ratio should look like this:

Operating Cash Flow: Operating Cash Flow/Total Debts


= 2 Times

3. Debt Ratios: Debit ratios are also known as leveraging ratios. The ratio is defined as the ratio of total debt to total assets expressed as percentage. These ratios can be interpreted as the proportion of total company’s assets that are financed by company’s debt. The higher of these ratios represent that the company is more leveraged with its debt associated with more financial risk. There are mainly four debt ratios Companies would like to know:

Debit Equity Ratio: Debt equity ratio represent the shareholders equity and the debt used to finance company’s assets. The debt equity ratio can be interpreted as proportion of long term debt plus Value of Leases divided by Total Assets.

Debit Equity Ratio:    Total Liabilities/ Shareholder Equity

For Example: If a company has its total liabilities of $200,000 and total shareholders’ equity of $800,000. Its debt to equity ratio will look this:

Debt Equity Ratio:     $200,000/$800,000

= .25

Total Debt Ratio: Total debt ratio represent the company total liabilities to total assets. The lower the ratio means the company is less dependent on its leverage. In other words, the higher the ratio, the more risk company is taking.

For Example: Let’s assume company total assets at the end of reporting period amounted to $900,000 on the balance sheet. So the total debt ratio will look like this:

Debt Ratio:         Total Liabilities/Total Assets

Debit Ratio:    $200,000/$900,000

= 22%

Interest Coverage Ratio: Interest coverage ratio is commonly used by companies to determine if it can pay interest expenses on its outstanding debt. The ration is calculated by dividing the company earnings before interest and taxes (EBIT) by the total interest expenses. The lower the ratio, the more the company is burdened by its debt expenses. The ratio of less than 1.5 is considered risky as company ability to pay interest expenses will be questionable.

For Example: ABC LTD has its earnings before interest and taxes amounted to $200,000 and Interest expenses amounted to $28,000.

Interest Coverage Ratio:  Earnings before Interest and Taxes/ Interest Expenses

Interest Coverage Ratio: $200,000/$28,000

= 7.14

This represent that the company has good margin of safety to cover its interest expenses.

Cash Flow to Debt Ratio: The cash flow to debt ratio is calculated by dividing the company operating cash flow by total debit. The ratio tell the business owner if they have the ability to cover their debit from its operating cash flow earning. The higher the ratio is, the chances that better the business owner to carry its total debt.

For Example: The Company ABC Ltd. have total operating cash flow amounted to $100,000 and its total debt at the end of reporting period are $130,000. The cash flow to debt ratio will  look this:

Cash Flow to Debt Ratio:         Operating Cash Flow/Total Debt


Cash Flow to Debt Ratio:     $100,000/ $130,000

=   .77

4. Activity Ratios: Activity ratios are those ratios that all business owners like to know if they have the ability to convert different accounts of balance sheet in to cash or sales. These ratios widely used to measure the relative efficiency of a company assets, leverage or other balance sheet items. There are mainly three activity ratios that businesses would like to know:

Stock Turnover Ratio: Stock turnover ratio can be calculated by dividing the cost of goods sold by average inventory. Generally the stock turnover ratio can also be calculated by dividing the sales by Inventory. A low turnover is normally considered a bad sign because products value tend to deteriorate as they sit in the warehouse for longer than average period of time.


Stock Turnover Ratio:           Sales/ Inventory


Stock Turnover Ratio:     Cost of Goods Sold/ Average Inventory

For Example: If a company shows its sales at the end of reporting period amounted to $500,000 and its inventory shows total to $200,000, then stock turnover ratio should look like as follows:


Stock Turnover Ratio             $500,000/$200,000

= 2.5

Assets Turnover Ratios: Assets turnover ratio is calculated by dividing the sales or Revenues by Total assets. Generally speaking, the higher the ratio, the better it is as company generating more revenue per dollar of assets.

For Example: ABC LTD. has total sales at the end of reporting period amounted to $500,000 and its total assets appears on balance sheet at the end of reporting period amounted to $750,000. Then assets turnover ratio can be calculated as follows:


Assets Turnover Ratio:   $500,000/$750,000

= 67%

Inventory Conversion Ratio: Inventory conversion ratio is calculated by total inventory to cost of sales divided by 365. The inventory conversion is measured as against the time required to acquire raw materials for a product, manufacture and then sell it.

Inventory Conversion Ratio        Inventory/Cost of Sales/365

In addition to helping management and owners of business in diagnosing the financial health of their company or business, ratios can also helpful for managers to make decisions about investments or projects that the company is considering to take, such as acquisitions, or expansion.

Still confused or need to brush up your knowledge on financial ratios? Connect with our Online Accounting Tutor and get the help right away.

Why Ignoring Variance Analysis Will Cost You Sales?

Variance AnalysisVariance analysis is an integral part of any business to be successful. It is an important tool for budgetary control by means of evaluating the business performance by analyzing the variance between budgeted amount, planned amount or standard amount and actual amount spent.

What is Variance Analysis?

Variance analysis is the difference between standard cost and actual cost incurred during a given period. Variances analysis can be performed both at cost and revenues level. In other words, if a business owner wants to know what is his planned result and how it will look when comparing it with actual results so he can see the overall performance of the business.

For Example: ABC Company has its monthly sales short by $4000.00 as compared to the forecasted sales of $20,000. The percentage of change was 4000/20000 was 20%. This was due to the fact that business lost one big customer who used to buy the company products for $3,500.00 due to late deliveries of shipment to the customer. That resulted a miss in the forecast of sales.

This kind of variance analysis helps businesses to understand why there is was fluctuation in its business and what it can do make changes in order to prevent this in the future.

That was just one example of variance analysis that business can perform regularly, there are several other most commonly used variances that business can use to determine the health of its business such as:

Selling Price Variance: This analysis can be performed by subtracting standard selling price from actual selling price multiplied by actual number of units sold.

Purchase Price Variance: This can be performed subtracting the standard cost from actual price paid for materials used in the production and then multiplied by the actual number of units sold.

Labor Efficiency Variance: Labor efficiency is performed most by manufacturing company where the business owner would like to know what is the labor efficiency variance for a given period of time. This can be calculated simply by subtracting the standard quantity of labor consumed from the actual amount and then multiplied by the standard price per unit.

Direct Labor Rate Variance. This is very important tool that every business owners wants to know about what is the labor rate variance. This can be performed by subtracting standard labor cost from actual price paid for the direct labor and then multiplied by the number of units sold. Direct labor is considers those manpower who are directly used in the production such as machine operator.

Direct Material Yield Variance: This analysis can be performed by subtracting the total standard quantity of material from the actual quantity used then multiplied by the standard price per unit.

Fixed Overhead Spending Variance: Fixed overhead are those expenses that never changes irrespective of sales volume such as salary, rent, insurance, utility expenses. This analysis can be simply performed by subtracting standard cost from fixed overhead cost for any reporting period. If the standard cost exceeds the actual fixed overhead the analysis can assume that they have controlled and managed their fixed expenses well. In other words, if standard fix overhead expenses exceed actual fixed overhead expenses, then business is spending more than on its fixed expenses than its planned.

Variable Overhead Expenses Variance: Variable overhead expenses are those expenses which tend to change when sales volume change such as cost of cost of goods sold, sales commission. This variance can be performed by subtracting the standard variable cost per unit from actual cost incurred during any reporting period and the multiplied by the total actual units.

These variances helps the business owners to understand and manage the present cost and control the future cost. By applying these variances in practice, businesses or companies can save its cost and therefore increase the value of its stockholders.

Still confused about how to apply these variances analysis using excel? Connect with our online accounting tutor today and lean to how to become master in the variance analysis.

3 Ways Companies Can Lower Its Break-even Point

Online Accounting Tutor, Break-even PointBreak even analysis is a key financial tool that every business uses to find out how much they would have to sell in order to cover their fixed expenses. You as a business owner should know about what are your fixed and variable expenses. Break-even point is calculated to determine how much volume of sales you need in order to make profits. It is also an important part of cost-volume-profit analysis.

What is Breakeven Point?

A company break-even point is the point where business sales are equal to both variable and fixed expenses. The company will need to sell enough units in order to be no profit or no loss. This point is called break-even point.

If company sells fewer units of its products, it will incur loss as it will not be able to cover all fixed and variable expense or in other words, if it sells more, it will make profits. To calculate a break-even point, you will need to remember three things:

  • Fixed Expenses: Fixed expenses are those expenses that do not change irrespective of sales volume such as rent, salary, insurance, utilities, office, depreciation, fees etc.
  • Variable Expenses: Variable expenses are those expenses which tend to change with the volume of sales such as cost of goods sold.
  • Price: The price of the product is the price set by the company to sell at wholesale price or cost of manufacturing the product plus mark up.

The Formula for calculating Breakeven Point:

Fixed Cost/(Sell Price-Variable cost)= Breakeven Points (In units)

In the above example, the fixed costs are stated as a total cost whereas the variable cost is stated as per unit cost. In other words the variable cost is calculated by deducting variable cost per unit from sell price per unit. It is also called contribution margin. In other words, the contribution margin is calculated as follows:

Contribution margin =Sell price per unit – variable cost per unit

Example: ABC Inc. has its fixed cost consisting of rent for property, executives’ salaries, property taxes and depreciation on fixed assets for up to $120,000. Its variable cost consisting raw material, factory labor, and sales commission calculated as $1.60 per unit, the product selling price is at $4.00 each.

Given the above example, we can calculate the ABC breakeven point as follows:

Break-Even Point: Fixed Cost/ (Selling Price-Variable Cost)

Break-even Point (BEP): $120,000.00/ ($4.00-$1.60)

=50,000 Units

Give the above example, Company would need to sell 50,000 units to cover its fixed expenses. This is called Break-even point where company will be making no profits and no loss. So If company need to make profit, it would need to sell more than 50,000 units.

3 ways to lower your Break-Even Point:

Let’s say, if the economy is in downturn or recession, the sales volume will drop as there will be less demand for the product company sell. In that case, company will not sell enough to cover its fixed expenses.

In the above example, ABC Company will not be able to sell 50,000 units to cover its fixed expenses. Here is what company can do to sustain in the downturn market.

  1. Company can either increase its sales price so it can meet its fixed expenses. Or
  2. It would have to cut down its fixed expenses so even if the sales volume down, it can still cover fixed cost.
  3. Up-sell and Cross-sell

Let’s say you have found a way to reduce your fixed cost. You are getting a cut in your salary by $20,000. Now the fixed cost will be amounted to $100,000. The new break-even point will look like as follows:

Break-even Point (BEP): 100,000.00/ ($4.00-$1.60)

= 41,666 Units

As you can say, the company will now need to sell 41,666 units as compared wit 50,000 units to cover its fixed cost.

In another example, let’s say you don’t want to make a cut in your salary, instead you would like to raise product selling price per unit.

The new selling price is $4.50

Break-even point= 120,000/ ($4.50-$1.60) =41,379 units

In both the example, you will need to sell lesser units to cover your fixed expenses. However, the better option is number two where company to raise its selling price.

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