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Financing and cost accounting

3.2 The margin of safety

This is the point at which anticipated sales can fall below budget before a business
makes a loss.

units = Total budgeted sales – Break-even point

Or
Total budgeted sales – Break-even point
as a % of budgeted sales = –––––––––––––––––––––––––––––––––

Total budget sales
3.3 Key limitations

 Assumes a constant selling price

 Ignores (dis)economies of scale

 Difficult to cope with stepped fixed costs

 Only relevant in the short term.

Illustrations and further practice

Now try TYU question 6.

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