The Purpose of a Margin of Safety in Management Accounting

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Margin of safety in management accounting is defined as the difference between the actual sales of a company and the sales at which the company achieves its break-even point. Break-even sales are the point where the company neither makes profits nor incurs losses for manufacturing and distributing the product.

Function

The margin of safety establishes the surplus of actual sales earnings over and above the break-even earnings. The formula for calculating margin of safety is Actual Sales - Break-even Sales Earnings.

Significance

Companies use the margin of safety in management accounting to establish the strength and potency of the business. The higher the margin of safety, the sturdier it deems business. Companies attempt to place their selling price at such a point in order to cover fixed and variable costs.

Limitations

There are some flaws with the margin of safety concept. It only analyzes the supply side of the business. Also, it presupposes that the fixed costs are going to remain constant throughout the business' operation.

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